Published May 12, 2026

At a Glance

• Time is the greatest investing advantage a child has — even modest early contributions can compound meaningfully over decades.
• 529 plans, custodial accounts, and custodial Roth IRAs each offer different trade-offs around taxes, control, flexibility, and financial aid.
• The account matters, but the family conversations around money, investing, and stewardship often matter even more.

Spring is graduation season, and that means it is also the season when we hear a version of this question almost weekly: parents and grandparents asking how to give the young people in their lives a real head start with their money — not just a check tucked into a card, but something with staying power.

It's a thoughtful instinct. Children and grandchildren have one asset working in their favor that no investor can buy back later: time. A modest contribution made when a child is five or ten years old has decades to compound before it's ever drawn down. That is the entire engine behind multi-generational wealth, and it's available to any family willing to start.

The challenge is choosing the right vehicle. Each account type below carries trade-offs — tax treatment, control, financial aid impact, flexibility — and the right answer depends on what the money is for and how much control you want to keep. Here is how we typically frame the choices for clients.

529 Plans: The Workhorse for Education

For most families, a 529 plan is the first account we'd consider. It's built for one purpose — education — and the tax benefits are hard to beat: tax-deferred growth, tax-free withdrawals for qualified education expenses, and no federal contribution limits. Annual contributions above the gift tax exclusion ($19,000 per donor per beneficiary for 2026) start to use lifetime gift exemption, but a five-year "superfunding" election lets grandparents accelerate up to five years of gifts into a single year — a useful tool when timing matters.

Qualified expenses have broadened meaningfully. In addition to college, families can use up to $10,000 per year for K–12 tuition, fund graduate school, or apply $10,000 (lifetime) toward student loan repayment. Unused balances can be rolled to another family member or, in some cases, into a Roth IRA for the beneficiary. We covered the broader question of how to sequence different education dollars in How to Pay for College.

One caveat worth flagging: 529 ownership matters for financial aid. A 529 owned by a parent generally has a smaller impact on need-based aid than one owned by the student or, historically, by a grandparent. Recent FAFSA changes have softened the grandparent-owned 529 penalty, but the rules continue to evolve — coordinate before opening accounts in a grandparent's name if aid eligibility is on the table.

Custodial Accounts (UGMA/UTMA): Flexibility With Real Trade-offs

Not every gift to a child is meant for tuition. For families thinking about a future car, a wedding, a down payment on a first home, or simply a longer-horizon investment account, a UGMA or UTMA custodial account is often the right tool. These accounts are simpler than a trust to set up and can hold a wide range of investments — stocks, bonds, mutual funds, ETFs — and, in the case of UTMAs, even more complex assets like real estate, art, or intellectual property.

There are no contribution limits, and the money can be used for anything that benefits the child while they're still a minor. But here is the trade-off we make sure parents understand before they fund one: at the age of majority — typically 18 to 21, depending on the state — the child takes full ownership and can use the money however they choose. We've seen this work beautifully when families pair the account with conversations about money. We've also seen it become a teachable, expensive lesson when those conversations don't happen. (We've written before about why those conversations matter and how to start them in Family Conversations About Money.)

Custodial accounts also trigger the "kiddie tax," which applies to a minor's unearned income. For 2026, the first $1,350 is tax-free, the next $1,350 is taxed at the child's rate, and amounts above that are taxed at the parent's marginal rate. And because these accounts are considered the child's asset, they typically reduce financial aid eligibility more than a parent-owned 529 would. None of this disqualifies them — but it does mean they should be funded with intention, not as an afterthought.

Custodial Roth IRAs: The Long Game

For the family that wants to give a young person a true generational gift, it's hard to compete with a custodial Roth IRA. Decades of tax-free compounding, followed by tax-free withdrawals in retirement, is precisely the kind of asymmetric outcome time can produce. A child who funds a Roth at age sixteen and never contributes again can still reach retirement with a meaningful balance — without ever paying tax on the growth.

The catch: a Roth IRA requires earned income. Babysitting, lifeguarding, tutoring, a summer job at the family business — all qualify, but the contribution is capped at the lower of the child's actual earnings or the annual limit ($7,500 for 2026). Documentation matters. We typically recommend keeping a simple log of hours and pay, particularly when the earnings come from informal work, so the contributions are defensible if questioned.

Don't Skip the Other Half of This: the Conversation

Setting up accounts is the easy part. The harder, more valuable work is the financial literacy that goes around them. The young people in our clients' families who arrive at adulthood prepared to handle money tend to share a common experience: they grew up in households where money was discussed openly, where investment statements were reviewed at the kitchen table, and where they were brought into decisions early — not handed a portfolio at twenty-two.

Reviewing a 529 statement together is a free lesson in compounding. Letting a teenager help allocate a custodial Roth across a few low-cost funds is a free lesson in diversification. The accounts are the vehicle; the conversations are the road.

One Note on What's Coming

There is one more account type worth flagging that the original framing here didn't anticipate: Trump Accounts, a new vehicle created under recent legislation that adds another option to this toolkit. They have their own contribution rules, tax treatment, and trade-offs, and they fit alongside — not in place of — the accounts above. We'll cover them specifically next week.

How We'd Approach This With Your Family

There is no single right answer to "how should I invest for my kids." The right answer is the combination of accounts that fits your goals, your tax picture, and the role you want money to play in the next generation's life. For families with meaningful gift capacity, the question is often less "which one" and more "in what order, and how do they coordinate with the estate plan." That coordination is where we add the most value — and it's the same lens we apply to estate planning more broadly (see Protecting What's Yours (After You Pass)).

If you're thinking about funding accounts for children or grandchildren this year — particularly before a graduation, a wedding, or a year-end gifting deadline — we're happy to sit down and walk through which combination makes sense. Reach out and we'll set up a time.