Can I Open an Investment Account for My Grandchild?

Yes, you can open an investment account for your grandchild, and you have three main choices: a custodial account under your state’s UGMA or UTMA law, a 529 education savings plan, or a custodial Roth IRA if your grandchild has earned income. Each one answers a different question. A custodial account is flexible but hands the money over outright when your grandchild comes of age. A 529 keeps you in control and grows tax-free for school. A custodial Roth gives a working teenager decades of tax-free retirement growth. The right pick depends on what you want the money to do.

The Three Account Types at a Glance

A UGMA or UTMA custodial account is an ordinary brokerage account owned by the child but managed by you. You transfer cash or securities in, invest on the child’s behalf, and the money can eventually be used for anything. No trust, no court, no paperwork beyond the brokerage application. Every state has adopted some version of these laws.

A 529 plan is a tax-advantaged account built for education. You are the account owner, your grandchild is the beneficiary, and you decide when withdrawals happen. Earnings grow free of federal income tax, and withdrawals for qualified education expenses come out tax-free.¹ Qualified expenses include college tuition, fees, books, room and board, and computer equipment; up to $10,000 per year of K-12 tuition; registered apprenticeship costs; and up to $10,000 of student loan repayment over the beneficiary’s lifetime. Pull money out for something else and the earnings portion gets hit with ordinary income tax plus a 10% federal penalty.² More than 30 states offer their own income tax deduction or credit for contributions, usually only if you use the home-state plan.

A custodial Roth IRA works only if your grandchild has earned income from a job, babysitting, lawn care, or similar work. You can contribute up to the lesser of what they earned or $7,500 for 2026.³ The dollars don’t have to be the ones they earned; you can gift the money and they can contribute it, as long as they actually earned at least that much during the year. A 15-year-old who puts in a few thousand dollars has 50 years of tax-free growth ahead. Contributions can be pulled out anytime without tax or penalty, and earnings come out tax-free after age 59½.

Who Keeps Control, and Until When

This is the question that catches grandparents off guard, so it’s worth thinking through before you fund anything.

With a custodial account, the money legally belongs to your grandchild from day one. You manage it as custodian, but you have a legal duty to invest it in the child’s interest, and you cannot take it back. When your grandchild reaches the transfer age set by your state’s law, the account becomes theirs with no strings attached. In most states that happens at 21 for irrevocable gifts; some states set the age at 18, and some let the donor specify a later age, in a few cases as late as 25.⁴ A 21-year-old inheriting $50,000 can spend it on tuition, a car, or a trip around the world. That is the biggest drawback of custodial accounts, and it does not go away.

With a 529 plan, you stay in control indefinitely as the account owner. You decide when to take distributions, and you can change the beneficiary to another qualifying family member if your grandchild doesn’t need the money.

A custodial Roth IRA transfers to the child at the state’s age of majority, like a UGMA or UTMA account, but the money is still inside a retirement account with its own withdrawal rules.

Whenever you open a custodial account, name a successor custodian on the application. If you die or become incapacitated before the account transfers, the successor takes over without a court proceeding. Most brokerage applications have a field for this.

Taxes on Contributions and Earnings

Any money you move into a grandchild’s account counts as a gift for federal tax purposes. In 2026 you can give up to $19,000 per grandchild without filing a gift tax return. Married grandparents can each give $19,000, so a couple can transfer $38,000 per grandchild per year. Gifts above the annual exclusion require IRS Form 709 and reduce your lifetime gift and estate tax exemption, which is $15,000,000 for 2026.⁵

529 plans have a special accelerated gifting rule. You can put in up to $95,000 in a single year, or $190,000 for a married couple, and elect to treat it as spread evenly over five tax years for gift tax purposes.² During those five years you cannot make additional gifts to that beneficiary without using more of your exclusion.

Earnings are where the account types diverge sharply. Investment income inside a UGMA or UTMA account belongs to the child, and once the child’s unearned income exceeds $2,700 in 2026, the kiddie tax kicks in and the excess is taxed at the parent’s marginal rate, not the child’s.⁶ This applies to children under 18 and, in some cases, full-time students under 24. A large custodial account that throws off dividends and capital gains can quietly generate a meaningful parental tax bill.

Earnings in a 529 plan grow federally tax-free, and qualified education withdrawals stay tax-free.¹ A custodial Roth IRA also grows tax-free, with no tax on qualified distributions after age 59½.⁷

Effect on College Financial Aid

If your grandchild will apply for federal financial aid, the account type matters. UGMA and UTMA balances are reported as the student’s own asset on the FAFSA and are assessed at a higher rate than parent-owned assets, so a large custodial account can meaningfully cut need-based aid.

Grandparent-owned 529 plans used to cause a similar problem, because distributions were treated as student income and could sharply reduce aid. Starting with the 2024–2025 academic year, the simplified FAFSA removed that requirement. Grandparent-owned 529s no longer have to be reported, and distributions from them no longer affect federal aid calculations. That change makes a grandparent-owned 529 far friendlier to a grandchild’s aid picture than it used to be.

One boundary: many private colleges use the CSS Profile in addition to the FAFSA, and the CSS Profile may still take grandparent-owned 529 plans and their distributions into account. If your grandchild is heading toward a private school, check how that school treats grandparent 529s before you commit to a large contribution.

Leftover 529 Money Can Become Retirement Money

A rule that took effect in 2024 under the SECURE 2.0 Act lets unused 529 funds roll directly into a Roth IRA for the same beneficiary. This takes a lot of the risk out of overfunding. The conditions:

The 529 must have been open for at least 15 years.
Total rollovers for that beneficiary are capped at $35,000 over their lifetime.
Each year’s rollover counts against the regular Roth contribution limit, $7,500 for 2026, reduced by any other IRA contributions that year.³
Contributions made to the 529 in the last five years cannot be rolled over.
The 529 beneficiary and the Roth IRA owner must be the same person.

Open a 529 when your grandchild is born, and by the time they finish college the account is well past the 15-year mark. At the annual contribution limit it would take about five years to move the full $35,000 into a Roth.

What You Need to Open the Account

You’ll provide identifying information for both of you. For the child: full legal name, date of birth, Social Security number, and residential address. For yourself: Social Security number, address, and employment details. Financial institutions need the child’s Social Security number for federal tax reporting.⁶

Most brokerages and state 529 portals let you finish the application online in about 15 minutes. You’ll be listed as custodian on a UGMA, UTMA, or custodial Roth, or as the account owner on a 529, with your grandchild named as the beneficiary. You then pick an investment allocation and fund the account by electronic transfer or check. Minimums vary. Many brokerages have dropped them entirely for custodial accounts, and 529 plans often start as low as $25. Once the account is open and funded, you’ll get a confirmation with the account number and the custodial or ownership agreement, and regular statements track the account from there.

1
Internal Revenue Service. 529 Plans: Questions and Answers
2
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
3
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
4
Social Security Administration. SSA POMS SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA)
5
Internal Revenue Service. Whats New – Estate and Gift Tax
6
Internal Revenue Service. Topic No. 553, Tax on a Childs Investment and Other Unearned Income (Kiddie Tax)
7
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts