Financial Foundations for the Next Generation
Quick Take
Saving and investing for children’s futures – Families have multiple account types available, each with unique rules, tax benefits, and flexibility to help meet goals ranging from education to homeownership to retirement.
529 College Savings Plans – Tax-advantaged accounts designed to help families keep pace with rising education costs, offering state tax incentives, qualified education expense coverage, and even limited Roth IRA rollover opportunities.
Custodial Brokerage Accounts (UTMA) – Flexible investment vehicles that allow adults to gift and grow assets for a child, with fewer restrictions on withdrawals and a wide range of investment options beyond education.
Custodial Roth IRAs – Retirement accounts for minors with earned income that harness the power of decades-long tax-free compounding, providing one of the most effective ways to front-load long-term wealth.
Trusts – Legal arrangements that can allow families to transfer assets to children or grandchildren with customized rules for distribution, potential tax advantages, and protections that support both immediate needs and long-term legacy planning.
Planning for a child’s financial future can seem daunting, given the vast array of savings and investment options. Each account type offers distinct features, tax incentives, and eligibility requirements, making some better aligned with specific objectives. Whether your priority is funding higher education, allowing the child flexibility to use assets for diverse purposes, or launching their retirement savings decades early, parents and grandparents have robust resources available. In this post, we’ll examine four of the most influential accounts for establishing a child’s financial footing: the 529 College Savings Plan, the Custodial Brokerage Account (UTMA), the Custodial Roth IRA, and trusts.
529 College Savings Plan
As the cost of higher education continues to climb, often outpacing inflation, it's no surprise that parents, grandparents, and even students are looking for smart ways to get ahead. A powerful tool in this effort is the 529 education savings plan account. A 529 account is a state-sponsored, tax-advantaged investment vehicle designed to make future education costs more affordable by leveraging the power of the financial markets.
Key Information:
529 accounts must be owned by an adult, typically a parent or grandparent, and are managed for the benefit of the account’s beneficiary.
Contributions are not deductible at the federal level; however, most states offer a state income tax deduction if the contributions are made to their specific state’s 529 program.
There are no annual contribution limits; however, contributions are considered to be gifts, which means you can give $19,000 to an individual ($38,000 for married couples) without having to file a gift tax return.
Investment options vary by plan sponsor; however, investment options are typically limited to exchange-traded funds, mutual funds, and target date enrollment funds.
Investment growth and withdrawals are tax-free if they are used for qualified education expenses.
Qualified education expenses include tuition & fees, books & supplies for coursework, technology used for studies, K-12 tuition, & expenses associated with a trade apprenticeship.
Unused 529 funds can be allocated to a new beneficiary; however, they must be a family member of the account’s original beneficiary.
The passage of Secure Act 2.0 opened the door to limited 529 to Roth IRA conversions. 529 accounts open for 15 years or more are eligible to convert up to $35,000 to jump start a Roth IRA.
Grandparent Loophole: 529 accounts owned by parents are considered when calculating the student aid index (financial aid eligibility). On the other hand, 529 accounts owned by grandparents do NOT impact financial aid eligibility.
Custodial Brokerage Accounts (UTMA)
When it comes to planning for your child or grandchild’s financial future, flexibility can be a leading factor when deciding which account to open. This is where custodial brokerage accounts, commonly referred to as UTMA accounts, shine. These accounts allow adults to gift and invest assets on behalf of a minor, providing the opportunity to build wealth early while maintaining oversight until the child reaches adulthood. Unlike 529 accounts, custodial brokerage accounts aren’t limited to qualified education expenses and can support a wide range of future goals such as buying a car or a down payment on a first home.
Key Information:
Uniform Transfer to Minors Act (UTMA) accounts can be opened for anyone under the age of 18.
The account belongs to the child; however, an adult must serve as the custodian until the child reaches the age of majority.
The age of majority varies from state to state; however, the age of majority in most states is 21. The standard age of majority in Tennessee is 21; however, it can be extended to age 25.
There are no set annual contribution limits to UTMA accounts; however, gift tax rules still apply.
Investment options are less restrictive than 529 accounts, which means you can invest in exchange-traded funds, mutual funds, individual stocks, bonds, etc.
Withdrawals from the account can be made at any time; however, they must be taken for the benefit of the minor.
Custodial Roth IRA
For families looking to give their children a true head start on building long-term wealth, few tools are as powerful as the custodial Roth IRA. As long as the child has earned income, a parent or grandparent can open and manage a Roth IRA on their behalf. The real advantage comes from time: even modest contributions made in the teenage years have the potential to compound tax-free for decades, creating a retirement bucket that could be worth hundreds of thousands – or even millions – of dollars by the time the child reaches retirement. Beyond retirement, Roth IRAs also provide flexibility with certain qualified withdrawals, making them a versatile and forward-thinking savings vehicle.
Key Information:
A custodial Roth IRA can be opened for a minor child with earned income, which may include wages from a part-time job or self-employment income from activities such as mowing lawns or babysitting.
Contributions are limited to the lesser of earned income or the IRS prescribed contribution limit, which is $7,000 for 2025.
Contributions are made with after-tax dollars and investment growth is tax-free!
Withdrawals of contributions can be taken at any time, tax and penalty free.
Earnings may be withdrawn at age 59 ½ - provided the account has been open for at least 5 years.
Starting contributions at an early age dramatically enhances the power of compounding, making this one of the most effective ways to front-load a lifetime of tax-free retirement growth.
Trusts for Children and Grandchildren
For families seeking a more comprehensive and flexible way to plan for the next generation, trusts can play a pivotal role. A trust is a legal arrangement that allows you to set aside assets for children or grandchildren while maintaining control over how and when those assets are distributed. Trusts can be customized to align with your family’s values, long-term financial goals, and even tax planning strategies.
Key Information:
Control Over Distributions: Unlike UTMA accounts, which transfer full ownership at the age of majority, trusts allow you to establish specific rules. You can decide whether funds should be distributed at certain ages, tied to milestones such as graduation, or reserved for specific purposes.
Asset Protection: Assets in a properly structured trust are shielded from creditors, lawsuits, and, in some cases, from a beneficiary’s poor financial decisions.
Tax Efficiency: Certain types of trusts can provide estate tax benefits, reduce probate costs, and allow assets to continue growing for future generations.
Legacy Building: Trusts aren’t limited to immediate needs. They can ensure your wealth benefits not only your children, but also future grandchildren, reinforcing multi-generational financial security.
Common structures include revocable living trusts (for flexibility and control during your lifetime) and irrevocable trusts (for tax planning and asset protection). For families with significant assets, specialized trusts such as generation-skipping trusts or education trusts may also be worth considering.
Trusts do involve legal and administrative complexity, so it’s important to work closely with an estate planning attorney and financial advisor to tailor the trust to your goals.
Final Thoughts
Unfortunately, there is no one-size-fits-all solution when it comes to preparing a child for financial success. A 529 plan may be the right fit for families focused on education, while a UTMA account offers flexibility for broader life goals, a custodial Roth IRA provides a head start on building tax-free retirement wealth, and trusts ensure long-term control, protection, and legacy planning. The best approach often involves a thoughtful combination of these tools, tailored to the child’s needs and the family’s long-term objectives. By starting early and choosing the right accounts and structures, families can turn today’s contributions into tomorrow’s abundance — giving children not only financial support but also a foundation for lifelong financial security.
Looking ahead, there is also an additional savings account, the Trump accounts, expected to launch next summer. While there are still many unknowns about how these accounts will work, we will continue to provide updates as more details become available.
If you would like to explore which of these strategies makes the most sense for your situation, don’t hesitate to reach out!
Contact us at 865-584-1850 or info@proffittgoodson.com
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