I want to save for my child’s future. Which account type should I choose?

As a financial planner and father of two young boys (Bo (3) and Kai (1)), I've spent a lot of time thinking about the best ways to save for their future. Should we prioritize college savings? Maybe set aside funds for their first home? How do we balance these goals with our own financial security? And perhaps most importantly, am I allowed to take money back out of Bo’s account every time he intentionally spills his milk on the rug and cackles like a maniac?

If you're a parent wrestling with these questions, welcome to the club! If there’s one thing I’ve learned from working with young families over the years, it’s that there's no one-size-fits-all solution. What works for one family may not be the best choice for another. Ultimately, your strategy should flow from your values, family’s needs, and the extent to which you are feeling vindictive about spilled milk ;)

Assuming your child has been well-behaved enough to justify saving some money for his or her future 😉, the natural next question becomes which account type(s) to utilize and how much to save. This article will focus on the first question, but I will return to the second in the near future.

If you’ve already begun to do some research, you know that the array of account types can be overwhelming, each with its own advantages and drawbacks.

In this guide, we will compare five of the most popular options:

1. Bank Accounts

2. 529 Plans

3. UTMA/UGMA Accounts

4. Taxable Brokerage Accounts

5. Roth IRAs for Kids

We'll delve into each option, discussing when it might be appropriate and potential pitfalls to avoid. And be sure to stick around to the end, where I'll share how my wife and I have structured our own savings plan for Bo and Kai. And no, it doesn’t involve any revenge-based withdrawals.

But First, a Few Basic Principles…

Before we dive into the various account types, it may be helpful to get clear on a handful of foundational principles.

Principle 1: Put your own oxygen mask on first.

I always encourage my clients to ensure they're saving adequately for their own basic needs in retirement before they commit to funding future college expenses. The logic here is simple- you can borrow for college, but not for retirement.

It’s no fun to make your kids take out loans for college, but it beats the heck out of needing to rely on your adult children for financial support because you’ve run out of money in retirement.

Principle 2: Time is your best friend

Compound interest is truly magical, but it takes time to do its thing. The longer you give your investment in your child’s future to grow, the better your outcome is likely to be.

Here’s a simple example to drive home the point:

Mary and Sam save $6k/yr ($500/mo) in a 529 for their son Felix’s future college expenses. They do this starting the year Felix is born all the way to his 18th birthday. Nicely done, Mary and Sam!

Todd and Wendy get a late start saving for their son, Michael. Knowing they need to make up for lost time, they start saving $12,000/yr ($1,000/mo) in a 529 on his 9th birthday and continue to save until his 18th birthday. Also impressive!

You’ll notice that the total amount saved is actually the same between these two couples-

Mary and Sam: $6k * 18 years= $108k

Todd and Wendy: $12k * 9 years= $108k

But as we’ll soon see, their outcomes couldn’t be more different. For the sake of simplicity, let’s say that both couples achieved a 7.5% annualized return in their sons’ respective 529s.

After saving continuously for 18 years, Mary and Sam would have around $214k, nearly half of which would have come from market growth.

As for Todd and Wendy, their son Michael’s 529 would “only”* have around $148k. By starting late, they sacrificed around $55k of market growth.

*Still a wonderful accomplishment, to be sure!

Principle 3: Just do your best

We sure do put a lot of pressure on ourselves to do right by our kids, don’t we?

I’ve talked to so many parents who are doing their best and still feel guilty about not saving enough. Some feel so guilty about this that they pretend the problem doesn’t exist and paradoxically end up not saving anything at all.

I know I just said that time is your best friend, and it is, but this doesn’t mean you should get down on yourself for not being able to commit to saving as much as you’d like to.

It can be really hard to save significant sums of money for your child’s future when their present is so darn expensive (ahem… looking at you, daycare).

So cut yourself some slack, especially in those early years, and create a plan to get caught up when it’s feasible to do so.

Principle 4: You’re allowed to mix and match (and change your mind)

You don’t have to commit to a single savings strategy. Technically, you could pursue all five of these strategies at the same time, though this would probably be unnecessarily complicated.

And there’s nothing keeping you from changing your approach later on as your family’s situation evolves. None of the following options require an ongoing commitment.

Comparing the Options- Bank Accounts, 529s, UTMA/UGMA, Brokerage Accounts, and Roth IRA for Kids

Bank Accounts

What they are: This category includes various types of bank accounts such as High-Yield Savings Accounts (HYSA), Certificates of Deposit (CDs), checking, and traditional savings accounts. These are FDIC-insured accounts that offer predictable, albeit relatively low, returns.

When it might make sense:

You're saving for short-term goals (less than 3 years away)
You're an ultra-conservative parent who prioritizes capital preservation above all else
You want to use the account as a tool for teaching kids about basic money management and saving
You need a place to park cash temporarily before moving it to a longer-term investment

When it might not make sense:

You're saving for long-term goals (college, far-off major purchases)
You're comfortable with some level of investment risk for potentially higher returns
You're concerned about the impact of inflation on your savings over time

Common misconceptions:

Bank accounts are completely risk-free. While they don't have market risk, inflation can eat away at the purchasing power of your savings over time.
The interest earned will meaningfully grow your savings. In reality, current interest rates on many bank accounts barely keep pace with inflation, if at all.
It's the safest option for long-term savings. Actually, the opportunity cost of not investing in growth-oriented assets can be significant over long periods.

Helpful tips:

Use bank accounts as a teaching tool. They're easy to understand and can help introduce kids to the concept of saving and earning interest.
Consider a high-yield savings account or CD for better returns than traditional savings accounts, especially for short-term goals.
Don't rely solely on bank accounts for long-term savings goals. The money is likely put to better use elsewhere if the goal is more than a few years away.
Remember that while FDIC insurance protects your principal, it doesn't protect against the erosion of purchasing power due to inflation.

529 Plans

What it is: A 529 plan is a tax-advantaged investment account designed to help families save for education expenses*. These plans are sponsored by states and offer tax-free growth and tax-free withdrawals when used for qualified education expenses. As an added bonus, many states offer a state tax deductions for contributions made to a 529 plan, which can provide an immediate tax benefit to savers.

*See here for a great list of expenses that are eligible for 529 reimbursement.

When it might make sense:

You're confident you want to help pay for college expenses
You value tax savings over flexibility
You want to maintain control over the money (unlike some other options we'll discuss)
You have other loved ones who could use the money if your child doesn't (e.g., other children, spouse, or even yourself)

When it might not make sense:

You're unsure about your child's future education plans
You want maximum flexibility with the funds
You're in a low tax bracket and wouldn't benefit much from the tax advantages or live in a state that doesn’t offer a deduction for 529 contributions

Common misconceptions:

You can only use 529 funds for college expenses. Not true! While non-qualified withdrawals incur a 10% penalty on earnings (plus taxes), 529s can now be used for K-12 tuition, apprenticeship programs, and even to pay off some student loans. More info on eligible expenses here.
If you don't use the funds for education, you'll pay a huge penalty. Actually, the 10% penalty only applies to the earnings portion, not the entire account balance.
Having a 529 plan will significantly hurt your child's chances for financial aid. In reality, 529 plans owned by parents have a relatively small impact on financial aid calculations. They're reported as parental assets on the FAFSA, which means only a maximum of 5.64% of the account value is considered available for college expenses. More on this here.

Helpful tips:

Not all 529 plans are created equal. They vary tremendously in terms of cost and investment lineup quality. While it might make sense to use your state's 529 program (especially if there are state tax benefits), there are cases where it might be preferable to use the plan from another state. To complicate matters further, many states offer multiple 529 accounts. Needless to say, it pays to shop around and compare your options.
You can change the beneficiary of a 529 account to avoid tax penalties. If one child doesn't use all the funds, you can transfer the account to another qualifying family member without incurring penalties.
As of 2024, a portion of unused 529 balances can now be used to fund a Roth IRA for your child. This new rule provides even more flexibility and can be a great way to jumpstart your child's retirement savings if they don't need all the 529 funds for education.
Want to fund educational endeavors for generations to come to make sure your great great grandchildren remember your name? Check out the little-known concept of a dynasty 529.

UTMA/UGMA Accounts

What it is: UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) are custodial accounts created to hold gifts or transfers for a minor. The main difference is that UGMAs are limited to financial assets like cash and securities, while UTMAs can include real estate and other property.

These accounts are managed by a custodian - typically a parent or guardian - but the assets belong to the minor. Once a gift is made, it can't be taken back, although the funds can be used for the child’s benefit. Investment earnings are taxed at the child’s tax rate, which is typically lower, unless your child is a baller like this kid.

When it might make sense:

You want to provide funds for your child beyond just education expenses
You're comfortable with your child having full control of the assets at the age of majority (18-21, depending on your state)
You want to take advantage of potentially lower tax rates on investment earnings
You want to make larger gifts without triggering a gift tax return(as of 2024, up to $18,000 per year, or $36,000 for married couples)

When it might not make sense:

You want to maintain control of the assets after your child reaches adulthood
You're concerned about how the assets might affect college financial aid eligibility (student assets reduce eligibility for need-based aid by 20% of the net worth of the asset)
You want to be able to change the beneficiary
You're looking for tax-deductible contributions
Your child, like mine, routinely fails the marshmallow test (does not bode well for their ability to manage money as a young adult 😉)

Common misconceptions:

The funds are locked up until age 18 or 21. In fact, the custodian can withdraw funds from a UTMA earlier provided the funds are used directly for the benefit of the beneficiary.
The account automatically transfers to the child at 18. Actually, the age of majority varies by state and can be up to 21 for UTMAs.

Helpful tips:

Don’t overlook the significant impact on financial aid. UTMA/UGMA assets are considered the child's and will reduce eligibility for need-based aid by 20% of the net worth of the asset.
Remember, you can't change the beneficiary once the account is established.
Think carefully about how much to contribute. Once your child reaches the age of majority, they'll have full control of the assets and thus be able to purchase as many marshmallows as they please.

Taxable Brokerage Accounts

What it is: A taxable brokerage account is a flexible investment account that allows you to buy and sell various securities (e.g., stocks, bonds, ETFs, mutual funds, etc.). Unlike specialized accounts like 529s or UTMAs, these accounts aren't specifically designed for child-related savings, but they can be effectively used for this purpose. The taxable brokerage account is the Lady Gaga of personal finance. It might not be the absolute best at any one thing, but wow, such range!

When it might make sense:

You value flexibility above all else in your savings strategy
You're unsure how much you'll ultimately be able to give your child
You want to retain full control over the funds
You might need to use the money for yourself in the future

When it might not make sense:

You're looking for tax advantages specific to education savings
You want to transfer ownership to your child easily without gift tax implications
You're certain about the amount you want to set aside for your child and don't need the extra flexibility

Common misconceptions:

You can add a minor as a joint owner of a taxable brokerage account. This isn't possible; minors can't be joint owners.
Adding an adult child as a joint owner avoids gift tax consequences. Actually, this still constitutes a gift in the eyes of the IRS and may require filing a gift tax return, not to mention a slew of other potential issues.

Helpful tips:

Consider creating a separate account specifically for child-related savings rather than commingling these funds with other investments. This can help you track and manage the money more effectively.
Be aware that if you give the money directly to your child later (for a down payment, for example), you might need to file a gift tax return if the amount exceeds the annual exclusion.
Remember, while you don't get upfront tax benefits, you can still employ tax-efficient investing strategies in these accounts.
If you're saving for a child's future but aren't sure how much you can commit, a taxable account allows you to defer that decision into the future while still growing the funds.

Roth IRA for Kids

What it is: A Roth IRA for kids is an account designed to give minors a head start on saving for retirement. As with regular Roth IRAs, Roth for Kids accounts are funded with after-tax dollars, which then grow tax-free forever. Similar to UTMA/UGMA accounts, the account must be managed by an adult (the custodian), then transferred to the child upon reaching adulthood. As we will see, the tax advantages of this can be pretty astonishing, but there’s a catch- your child must have earned income to participate.

When it might make sense:

Your child has earned income from jobs like babysitting, lawn mowing, or modeling
You want to take advantage of decades of tax-free growth
- Just to illustrate how powerful this can be, consider the following example: Joey (25) and Jimmy (15) are brothers. Joey has decided to contribute $7k of his earnings from his first full-time job to a Roth IRA. Inspired by his brother, Jimmy decides to contribute $7k (the entirety of his summer lawn mowing money) to a Roth IRA as well. Both boys leave their contributions in the account to grow (we will assume 7.5% annualized returns per year) until their respective 65th birthdays.

Joey’s initial $7k contribution grows to an impressive $126,310 after 40 years of compounding.

Jimmy ends up with $260,328 on his own 65th birthday. The additional 10 years of compound interest has allowed him to more than double his brother’s investment result. Go Jimmy!

You're looking to teach your child about long-term saving and investing
You're a business owner who can legitimately employ your child

When it might not make sense:

Your child doesn't have earned income
You don’t yet have a plan in place to fund short and medium term goals
You or your child need the funds to be more accessible before their retirement age
You're looking for immediate tax benefits

Common misconceptions:

You can pay your child any amount for any task. If only! The income needs to be legitimate and commensurate with market rates. Tempting as it may be, you can't pay your newborn $70,000/yr. to be your company's "Chief Cuteness Officer."
The money is locked away until retirement. Actually, contributions (but not earnings) can be withdrawn at any time without penalty. Still, withdrawing early from a Roth IRA largely defeats its primary purpose, which is to enable long-term tax-free growth.

Helpful tips:

Each year, your child can contribute the greater of their earned income or that year’s contribution limit ($7k for 2024).
Get creative with legitimate employment. For example, hiring your ten-year-old to write names and addresses on client holiday cards.
Convince reluctant savers with a "match." If your teen earns $7,000 mowing lawns, you might offer to put in $6 for every $1 they contribute. They would only need to save $1,000 to contribute the full $7,000 for 2024.
Be sure to keep adequate records of your child's earnings to justify the Roth IRA contributions.
Consider using the Roth IRA as a teaching tool for financial literacy and the power of compound interest.

Our Family's Approach

For Bo and Kai, we've implemented a two-pronged approach that balances our commitment to education with plenty of flexibility.

We've established 529 plans for both boys with a baseline goal of covering room, board, and tuition at a public in-state college. Currently, we're in a position to save more than technically required (assuming consistent savings over 18 years), so we're front-loading these accounts as much as we can. This strategy allows compound interest more time to work its magic and will allow us to significantly reduce contributions in later years if needed/desired.

We're also contributing to a taxable brokerage account. Life is unpredictable, and we want to keep our options open. This fund could potentially help the boys with a house down payment, fund graduate school, or support a startup idea. Alternatively, we might decide they're doing fine on their own and use it to enhance our retirement. The key is that we don't need to decide now.

This approach allows us to commit to funding their education while maintaining the flexibility to adapt to whatever the future holds. It's our way of supporting our kids while acknowledging that we can't predict what they (or we) will need 18 years from now.

Conclusion

Saving for your child's future is a deeply personal decision. There's no universally "right" approach—only the approach that's right for your family. Whether you opt for the tax advantages of a 529, the flexibility of a brokerage account, or any combination of the strategies we've discussed, the most important thing is thinking ahead and taking action when you’re able.

Every dollar you save now is a dollar your child won't have to borrow or earn later. Start where you can, when you can. Your future self (and your kids) will thank you.