If you’re saving money for your kids, you have several options. You might want to help pay for college, give them a head start on retirement savings, or help them buy their first home.
The right approach depends on what you want the money to accomplish, how much control you want to keep, and when you expect your child to need the funds.
One thing I would address first, though, is your own retirement. It’s natural to want to give your kids every possible advantage, but make sure you’re on track with your own financial goals before committing significant amounts of money to theirs. You can borrow for college, but you can’t borrow to fund your retirement. Your children have time to build their own wealth. Make sure you’re taking care of your financial future, too.
Here are several options to consider.
1. Parent-Owned Brokerage Account
If flexibility is important to you, a brokerage account in your own name is worth considering.
You control the account, choose the investments, and decide when to use the money. There are no annual contribution limits, and you aren’t required to use the funds for education or any other specific purpose.
The trade-off is that there are no special tax benefits. Interest, dividends, and realized capital gains may be taxable along the way, and the account generally remains part of your taxable estate.
The biggest advantage is control. You can help your child when the time is right without having to transfer ownership at a certain age.
Worth considering if: You want flexibility and aren't sure exactly when or how the money will be used.
2. UTMA/UGMA Custodial Account
A custodial account allows you to invest money for your child, but there’s an important distinction: the money legally belongs to the child.
You manage the account while they’re young, but contributions are generally irrevocable gifts. You can’t take the money back or change the beneficiary. When your child reaches the applicable age under state law, they gain control of the account and can generally use the money as they choose.
Investment income may also be subject to the kiddie tax rules. And because the account is considered the child’s asset, it can have a greater impact on financial aid eligibility than a parent-owned account.
Worth considering if: You want to make an irrevocable gift to your child and are comfortable giving them control of the money when they reach the applicable age.
3. 529 College Savings Plan
If helping pay for education is the goal, a 529 plan is often a good place to start.
Investment growth is tax-deferred, and withdrawals for qualified expenses are generally tax-free. Depending on your state, you may also qualify for a state income tax benefit.
You remain in control of the account, and you can generally change the beneficiary to another eligible family member if your child doesn't need all the money.
The main consideration is how the funds can be used. Nonqualified withdrawals can result in taxes on earnings and a penalty, although exceptions and other options for unused funds are available.
A parent-owned 529 is generally treated as a parent asset for FAFSA purposes, which is typically more favorable than having the money in a custodial account.
Worth considering if: You expect to help pay for college or other qualified education expenses and want the benefit of tax-free growth and withdrawals.
4. Permanent Life Insurance
You may have heard that permanent life insurance can be used to save for a child’s future while building cash value. Although these policies can serve a purpose, I would be cautious about using them primarily as a savings or investment strategy.
Permanent life insurance can come with significant costs, including insurance charges, policy expenses, and potential surrender fees. Accessing the cash value can also affect the policy’s performance and tax treatment.
For most families, I would look at a 529 plan or brokerage account first, depending on the goal. These are more straightforward ways to invest without adding the complexity of an insurance policy.
Life insurance is designed to provide insurance coverage. Buying a policy on a child simply to build savings is a different decision, and it’s worth carefully comparing the costs and alternatives before moving forward.
Worth considering if: There is a specific need for permanent life insurance and the family has evaluated the costs, limitations, and alternatives. If the primary goal is saving for a child, I would generally start elsewhere.
5. Trump Accounts
Trump Accounts are a new savings option designed to help children build assets for the future through a tax-advantaged investment structure.
Depending on eligibility and the applicable rules, an account may qualify for an initial government contribution, and families and other eligible contributors may be able to add money.
These accounts have specific contribution rules and restrictions. Children gain control at age 18, so parents should understand how ownership and access work before deciding whether an account fits their goals.
It’s also worth considering how these accounts fit alongside a 529 plan or a regular brokerage account rather than assuming one should replace the other.
Worth considering if: You want to explore a long-term savings option for your child and understand the contribution rules, tax treatment, and restrictions.
6. Own a Business? Consider Employing Your Child and Funding a Roth IRA
If you own a business, there may be another opportunity worth exploring: employing your child and helping them fund a Roth IRA.
If your child performs legitimate work for your business and earns income, they may be eligible to contribute to a Roth IRA, subject to the annual contribution limit and their earned income. This can be particularly valuable when a child is young because their investments have decades to grow.
The work must be real, the pay must be reasonable for the services performed, and applicable payroll and tax reporting requirements must be followed. You can't simply pay your child and make a Roth IRA contribution without legitimate earned income.
Which Option Makes the Most Sense?
Before opening an account, I would start with a few questions:
What are you saving for? College, a first home, general financial support, or long-term investing?
Do you want to maintain control? Some accounts require you to give the money to your child at a certain age.
How much flexibility do you need? Your plans may change, and some accounts are more restrictive than others.
Could financial aid be a factor? How an account is owned can affect its treatment in the FAFSA calculation.
What are the tax implications? Consider investment income, withdrawals, gifts, and estate planning.
Do you own a business? Employing your child and funding a Roth IRA may create an opportunity to address both business tax planning and your child's long-term savings.
What will it cost? Investment expenses and insurance charges can reduce what ultimately goes to your child.
The Bottom Line
There isn't one right answer for every family. A 529 plan may make sense for education, while a parent-owned brokerage account offers more flexibility. A custodial account can work if you're comfortable making an irrevocable gift. Business owners may have another option through legitimate employment and Roth IRA contributions.
I would generally be cautious about using permanent life insurance primarily to save for a child. And with newer options such as Trump Accounts, it's important to understand the rules before deciding how they fit into your plan.
You don't necessarily have to choose just one. Different accounts can serve different purposes.
Most importantly, don't lose sight of your own financial future. Helping your children financially is a worthwhile goal, but it should fit within your broader financial plan. Get your retirement savings on track first, then determine how much you can comfortably set aside for your children.
The goal is to help your kids get a strong financial start without putting your own retirement at risk.
Download the GUIDE