As parents and members of the “village,” one of the most meaningful ways to support your child’s future is through thoughtful financial planning. Whether you want to help pay for college, build a nest egg, or give your kids a head start on financial independence, there are several investment vehicles designed specifically for minors. Among the most popular and flexible options are Uniform Transfers to Minors Act (UTMA) accounts, 529 college savings plans, and custodial Roth IRAs. Understanding how each works can help you choose the best fit for your family’s goals.
Why Invest for Kids?
According to a 2024 Fidelity study, 73% of parents said saving for college was the top financial priority in their lives. But education is just one part of the picture. Teaching kids about money, helping them build wealth early, and offering tax-advantaged savings can set them on a path toward greater financial security as adults.
UTMA Accounts: Flexible Gifts for Kids
A UTMA account is a custodial investment account where you can transfer cash, stocks, bonds, or other assets to a child. The account is managed by a custodian (usually a parent or guardian) until the child reaches the age of majority in their state—typically between 18 and 21.
Key benefits:
- Flexibility: Funds can be used for any purpose that benefits the child, not just education.
- Investment choices: UTMA accounts allow a wide range of investments, including stocks, mutual funds, and bonds.
- Control: The custodian manages the account until the child assumes control in adulthood.
It’s important to remember that, once the child reaches legal age, the assets legally belong to them and can be spent without restrictions. That means it’s important to discuss financial responsibility well before the transfer of control.
529 College Savings Plans: Designed for Education
529 plans are specifically designed to help families save for education expenses. These state-sponsored plans offer several attractive tax benefits including:
- Tax-free growth: Investment earnings grow tax-free at the federal level, and withdrawals for qualified education expenses are also tax-free.
- High contribution limits: Many states allow contributions over $300,000 per beneficiary, making it a powerful tool for long-term saving.
- Estate planning advantages: Contributions reduce your taxable estate, which can be helpful for wealth planning.
Importantly, funds must be used for qualified education expenses such as tuition, books, and room and board, to avoid penalties and taxes on earnings. The account owner (usually a parent) retains control over the assets and can change the beneficiary if needed, offering flexibility if plans change.
A common question I hear from parents is, “What if my child doesn’t go to college or receives a full scholarship?” Fortunately, 529 plans offer more flexibility than many realize. In addition to being used for traditional college expenses, funds can be used for trade or technical schools, graduate programs, and can be withdrawn penalty-free in amounts that equal any granted scholarships. And thanks to recent legislation, there’s now an option to transfer unused 529 funds to a Roth IRA (within certain limits) providing a potential long-term benefit even if the original education path changes.
As of December 2024, total 529 plan assets have grown to over $500 billion nationwide, a testament to how popular and effective these plans have become.
Custodial Roth IRAs: Starting Retirement Early
A lesser known but valuable option is a custodial Roth IRA. While IRAs are typically for adults, minors with earned income, such as from a summer job or freelance work, can contribute to a Roth IRA with a custodian managing the account until they reach adulthood.
Why consider a custodial Roth IRA?
- Tax advantages: Contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.
- Long-term growth: Starting early allows decades of compound growth—potentially a significant nest egg by retirement.
- Financial education: Opening a Roth IRA provides a real-world opportunity to teach children about investing and saving for the future.
The main limitation is that contributions can’t exceed the child’s earned income in any given year. But even small amounts can grow substantially over time. For example, if a child invests $2,000 annually from age 15 to 65 with an average annual return of 8%, the account could grow to more than $1.1 million—a powerful start to lifelong financial security.
Choosing What’s Right for Your Family
Each of these investment options has its place, depending on your family’s goals and priorities. In many cases, families find that using a combination of accounts works best, for instance, pairing a 529 plan for educational expenses with a UTMA for more general savings or opening a custodial Roth IRA to give a working teen a head start on retirement. Regardless of which option(s) you choose, starting early provides time for growth and the chance to instill smart money habits early on.
At Abeona Wealth, we’re here to help you navigate these choices and set your investments up to align with your long-term goals. Ready to start a conversation about your child’s financial future? Reach out to our team today.