How to Put Money Away for a Child: 529s, Custodial Accounts & Roth IRAs

The main ways to save money for a child are a 529 education savings plan, a custodial account under the UTMA or UGMA, a custodial Roth IRA if the child has earned income, and a high-yield savings account or certificate of deposit. Which one fits best depends on what the money is for: education only, any purpose, retirement decades away, or short-term cash you might need to reach.

529 Plans for Education

A 529 plan is a tax-advantaged investment account built for education costs. Every state sponsors at least one, and you can generally enroll in any state’s plan regardless of where you live. You stay in control as the account owner; the child is the beneficiary and cannot pull the money out directly.¹

Contributions grow free of federal income tax, and withdrawals are tax-free when used for qualified education expenses. Those expenses cover more than tuition: fees, books, supplies, room and board, computers, internet access, and educational software all qualify. You can also use up to $10,000 per year for K–12 tuition at public, private, or religious schools.² More than 30 states offer a state income tax deduction or credit for contributions, with limits ranging from a few thousand dollars to unlimited depending on the state.

Non-qualified withdrawals are taxed differently. The earnings portion is subject to regular income tax plus a 10 percent federal penalty; your original after-tax contributions come back penalty-free.¹

If the child doesn’t need all the money, you have two exits. You can change the beneficiary to another family member — a sibling, cousin, or yourself — without triggering taxes or penalties.¹³⁴

Contributions count as gifts for federal tax purposes. In 2026, you can put in up to $19,000 per beneficiary, or $38,000 if you’re married and both spouses elect to split gifts, without filing a gift tax return.⁵ A rule unique to 529 plans lets you front-load five years of gifts in one shot: up to $95,000 from one person, or $190,000 from a married couple, spread evenly across five tax years for gift tax purposes. You report the election on Form 709, and you can’t make additional gifts to the same beneficiary during those five years without potentially triggering gift tax.¹

Custodial Accounts Under UTMA and UGMA

A custodial account set up under the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act lets a child own stocks, bonds, mutual funds, and in many states real estate, without the cost of a formal trust. An adult custodian manages the account until the child reaches the age set by state law.

The appeal is flexibility. There are no restrictions on how the child eventually spends the money, and no penalties for withdrawing funds during the account’s life as long as the custodian uses them for the child’s benefit. The trade-off is permanence. Every contribution is an irrevocable gift. Once you put money in, you cannot take it back. The custodian must manage the assets solely for the child’s benefit, and a court can remove a custodian and require an accounting for misused funds.

The age at which the child takes full, unrestricted control depends on state law. Most states set this at 18 or 21. Some let the donor specify a later age, up to 25 in several states and as late as 30 in at least one. Once the child reaches that age, the money is theirs to use however they choose, which matters when you decide how much to contribute.

Custodial Roth IRAs for a Working Child

If your child has earned income from a summer job, babysitting, tutoring, lawn care, or any other work, you can open a custodial Roth IRA in their name. The 2026 contribution limit is the lesser of $7,500 or the child’s total earned income for the year.⁴ If your teenager earned $3,000 over the summer, $3,000 is the cap for that year. The cash itself doesn’t have to come from the child’s paycheck; a parent can fund the contribution as long as the amount doesn’t exceed what the child earned.

Contributions are made with after-tax dollars, grow tax-free, and can be withdrawn tax-free in retirement. With decades of compounding ahead, even modest contributions can grow substantially. Contributions (but not earnings) can also be pulled out at any time without taxes or penalties, which gives the account a built-in safety valve. You manage it as custodian until the child reaches adulthood, at which point it converts to a standard Roth IRA in their name.³

High-Yield Savings Accounts and CDs

A high-yield savings account is the simplest place to start. Rates run well above standard checking or savings, and the money stays accessible. A parent or guardian typically opens the account as a custodian and manages the funds on the child’s behalf until the child reaches adulthood. Interest compounds over time, and even small regular deposits add up across a decade or more.

A certificate of deposit locks the money in for a set period, anywhere from a few months to ten years, in exchange for a guaranteed rate. Because the rate is fixed when you open the CD, the balance is shielded from rate drops during the term. The catch is limited access: withdrawing before maturity triggers an early withdrawal penalty, which can range from a portion of the earned interest to a percentage of the principal.

Both account types held at FDIC-insured banks are protected up to $250,000 per depositor, per bank, for each ownership category. A custodial account opened under the UTMA generally falls into the single-account ownership category for the child, meaning the child’s deposits at that bank are insured up to $250,000 separately from the parent’s own accounts.⁶

How a Child’s Investment Income Is Taxed

When a child earns interest, dividends, or capital gains in a custodial account or other non-retirement investment, the “kiddie tax” rules apply. For 2026, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s own rate. Anything above $2,700 is taxed at the parent’s marginal rate, which is usually much higher.⁷

The rules cover children under 18, and also children aged 18, or full-time students under 24, whose earned income doesn’t cover more than half their own support. The point is to prevent parents from shifting large portfolios into a child’s name to capture the child’s lower bracket.⁷

Two account types largely sidestep this. Earnings inside a 529 plan aren’t taxed at all when withdrawals go to qualified education expenses.¹ Earnings inside a Roth IRA grow tax-free and are not taxed on qualified retirement withdrawal. Custodial savings and brokerage accounts, though, are fully exposed to the kiddie tax once investment earnings cross $2,700.

Effect on College Financial Aid

The account you choose changes how much aid your child qualifies for. On the FAFSA, assets in UTMA or UGMA custodial accounts count as the student’s assets, no matter who set them up.⁸ Student assets are assessed at 20 percent under the federal formula, so every $10,000 in a custodial account raises the expected family contribution by $2,000.⁹

A parent-owned 529 plan is reported as a parent asset. Parent assets above a protection allowance are assessed at 12 percent.⁹ That gap, 20 percent versus 12 percent, means a parent-owned 529 has roughly half the impact on aid eligibility as the same amount in a custodial brokerage account. If protecting aid matters, that’s one of the strongest arguments for a 529 over a custodial account for education savings.

Opening and Funding the Account

Federal anti-money laundering rules require the institution to verify every person tied to a new account. To open any account for a child, you’ll generally need:

The child’s Social Security number, for tax reporting on interest, dividends, and gains
Your government-issued photo ID: driver’s license, state ID, or passport
Your Social Security number or tax ID
Proof of address, such as a utility bill, lease, or bank statement

Some institutions also ask for the source of funds and may require you to name a successor custodian who would take over if you become unable to manage the account. Applications are available through most brokerage and bank online portals or in a branch.

Once approved, you fund the account by linking an external bank account for an electronic transfer, which typically settles in one to three business days. Wire transfers settle same day but usually cost $25 to $35 domestically. Most institutions also accept mailed checks. Many state 529 programs have no minimum initial deposit, though some require up to $500 and often waive it if you set up automatic contributions. Custodial account and custodial Roth IRA minimums vary; many online brokerages have none.

Contributions in 2026 are covered by the $19,000 annual gift tax exclusion per recipient. As long as one donor’s total gifts to the child stay at or below that, no gift tax return is required.⁵ Married couples electing gift splitting can give up to $38,000 per child without filing.

1
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
2
Internal Revenue Service. 529 Plans: Questions and Answers
3
Internal Revenue Service. Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
4
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
FDIC. Your Insured Deposits
7
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
8
Federal Student Aid. Current Net Worth of Investments, Including Real Estate
9
Federal Student Aid. Student Aid Index (SAI) and Pell Grant Eligibility