Can I Invest Money for My Child: Accounts, Taxes, and Aid

You can invest money for your child through three main accounts: a custodial account under the Uniform Transfers to Minors Act (UTMA), a 529 education savings plan, or a custodial IRA if the child has earned income. Minors cannot legally own investment accounts on their own, so every option requires an adult to open and manage the account until the child is old enough to take over. The right choice depends on what the money is for, how much control you want to keep, and how the account will be taxed.

Custodial Accounts (UTMA)

A UTMA account lets you make an irrevocable gift to a child without setting up a trust.¹ Once the money goes in, you cannot take it back. You hold legal title as custodian and make the investment decisions, but the child holds equitable ownership, and you owe them a fiduciary duty: invest prudently, avoid conflicts of interest, and spend the money only for the child’s benefit. Using custodial funds for personal expenses can lead to court-ordered restitution and personal liability.

UTMA accounts are flexible about what they can hold. Beyond bank deposits and securities, UTMA property can include real estate, royalties, and artwork.¹ There are also no restrictions on how the money can eventually be used, which is the main appeal compared with a 529.

The catch is the handover. When the child reaches the age of majority set by the state where the account was created (21 in most states for irrevocable gifts, 18 in some, up to 25 in a few states that let the donor pick an age at opening), you must turn over the assets.² You cannot delay the transfer or attach conditions. If you refuse, the beneficiary can go to court to force it. If you worry about a young adult receiving a lump sum with no strings attached, this is a real drawback, and a 529 plan or a formal trust may fit better.

529 Education Savings Plans

A 529 plan is the strongest option when the goal is paying for education. Unlike a UTMA, you keep control of the account indefinitely. You choose when to withdraw, and you can even change the beneficiary to another qualifying family member without tax consequences.³ The beneficiary never gains a right to demand a distribution.

Qualified expenses at any accredited postsecondary institution include tuition, fees, books, supplies, computers, internet access, and required equipment. Room and board qualify if the student is enrolled at least half-time.³ You can also use up to $10,000 per year for K–12 tuition at public, private, or religious schools.⁴

Withdrawals spent on anything else trigger income tax on the earnings portion of the distribution plus a 10% additional tax penalty. The penalty applies only to earnings, not to the contributions you already paid tax on, but it still makes non-qualified withdrawals expensive.

The IRS defines “member of the family” broadly for beneficiary changes: siblings, first cousins, nieces, nephews, in-laws, and the beneficiary’s own future children all qualify.³

Rolling Unused 529 Funds Into a Roth IRA

If your child ends up with leftover 529 money, the SECURE 2.0 Act lets you roll it into a Roth IRA in the beneficiary’s name tax-free, up to a $35,000 lifetime cap per beneficiary. The 529 account must have been open for at least 15 years, and each year’s rollover counts against the annual Roth contribution limit ($7,500 for 2026), so moving the full $35,000 takes at least five years. Contributions made within the five years before a rollover are ineligible, and the transfer must go directly from the 529 plan to the Roth IRA.³ The beneficiary also needs earned income at least equal to the rollover amount for the year.

Custodial IRAs

A child of any age can have a Roth or traditional IRA, but only if the child has earned income. That means actual wages from a job or documented self-employment income from work like tutoring, yard care, or freelance gigs. Birthday money, allowances, and investment returns do not count. The IRS wants the income reported on a W-2, a 1099-NEC, or properly documented self-employment income on a tax return.⁵

The 2026 contribution limit is $7,500, or the child’s total earned income for the year, whichever is smaller.⁶ If your teenager earns $3,000 from a summer job, the maximum contribution is $3,000. Anyone can make the actual deposit, so a parent or grandparent can fund the whole contribution as a gift as long as the child legitimately earned at least that much.⁷

Most families pick a Roth for a child. Children usually earn so little that they owe minimal or no income tax, so paying zero tax on contributions now in exchange for tax-free withdrawals decades later is a strong trade. The custodial IRA passes to the child at the age of majority, just like any other custodial account.

Gift Tax When You Fund the Account

Money you put into any of these accounts is a gift for federal tax purposes. For 2026, you can give up to $19,000 per recipient per year without any gift tax reporting.⁸ A married couple can combine exclusions and give up to $38,000 per child.

Cross that line to a single recipient in a single year and you must file IRS Form 709, even if no gift tax is owed.⁹ The excess reduces your lifetime estate and gift tax exemption, which is large enough that most families never actually owe gift tax. The filing requirement itself is what catches people off guard.

529 plans have a special front-loading option. You can contribute up to five years’ worth of the annual exclusion in a single year and elect to spread the gift across five tax years. For 2026, one person can put in up to $95,000 at once, or a married couple $190,000, without exceeding the annual exclusion. You report the election on Form 709 and make no additional gifts to that beneficiary for the next four years. This gets a large sum invested early and maximizes tax-free growth.

How a Child’s Investment Income Is Taxed

Investment income earned inside a UTMA account is taxable, and the IRS has specific rules to keep parents from shifting wealth into a child’s lower bracket. These “kiddie tax” rules apply to children under 19, or under 24 if they’re full-time students who don’t provide more than half their own support.¹⁰

For 2026, the thresholds run in three tiers:¹¹

First $1,350 is covered by the child’s standard deduction and not taxed.
Next $1,350 is taxed at the child’s own rate, typically 10%.
Anything above $2,700 is taxed at the parent’s marginal rate, which can reach 37%.

Unearned income above $2,700 is calculated on Form 8615, filed with the child’s return, and the form requires the parent’s tax information.¹² Income earned inside a 529 plan or a Roth IRA does not run through this system. That is one of the reasons the tax-advantaged accounts are often the better home for growing balances.

How These Accounts Affect Financial Aid

The account you choose changes how much college financial aid your child can get. The FAFSA treats a UTMA account as the child’s asset, and student-owned assets are assessed at up to 20% of their value when calculating the expected family contribution. A $50,000 UTMA could reduce aid eligibility by up to $10,000.

A parent-owned 529 gets far better treatment. Parent assets are assessed at a maximum of 5.64% of value, so the same $50,000 would reduce aid eligibility by roughly $2,800. That gap alone often justifies picking a 529 over a UTMA for education savings.

Grandparent-owned 529 plans improved sharply under the redesigned FAFSA that took effect for the 2024–2025 academic year. The old rules counted distributions from a grandparent’s 529 as untaxed student income and hit aid eligibility hard. The new FAFSA no longer requires students to report cash support, so grandparent 529 distributions have no effect on federal financial aid. Private colleges using the CSS Profile may still consider grandparent contributions.

Matching the Account to the Goal

Each account solves a different problem, and many families use more than one. A 529 plan is the efficient choice for education costs because earnings grow tax-free, the FAFSA treatment is favorable, and the Roth rollover option handles leftover funds. A custodial Roth IRA turns a child’s early earned income into decades of tax-free compounding. A UTMA is the most flexible because the money can be spent on anything for the child’s benefit, but you pay for that flexibility with kiddie-tax exposure, a bigger financial aid hit, and a mandatory handover at the age of majority. Sorting out which goal each dollar is serving before you open the account will save you from moving money later.

1
Cornell Law School Legal Information Institute (LII). Uniform Transfers to Minors Act
2
Social Security Administration. SSA POMS SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA)
3
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
4
Internal Revenue Service. 529 Plans Questions and Answers
5
Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
6
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
7
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
9
Internal Revenue Service. Gifts and Inheritances
10
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
11
Internal Revenue Service. Revenue Procedure 25-32 – 2026 Adjusted Items
12
Internal Revenue Service. Instructions for Form 8615