Accounts for Saving for Kids: Overview
Savings vehicle comparison for children (2025)
| Account Type | Best For | Contribution Limit 2025 | Tax Treatment | Control Transfer Age |
|---|---|---|---|---|
| 529 Plan | Education savings | No federal limit (gift tax applies over $18K/yr) | Tax-free growth and qualified withdrawals | No forced transfer, parent retains control |
| UTMA or UGMA | General savings with no restrictions | Annual gift exclusion ($18,000 in 2025) | Kiddie Tax on earnings above threshold | 18 to 21 depending on state |
| Custodial Roth IRA | Retirement head start for working teens | $7,000 or earned income whichever is less | Tax-free growth and qualified withdrawals | 18 (becomes owner as adult) |
| Savings account (child's) | Teaching savings habits | None | Taxable at child's rate | Varies by account type |
529 Plans: The Education Savings Default
A 529 plan is the primary recommendation for education savings. Contributions grow tax-free, withdrawals for qualified education expenses are tax-free, many states offer state income tax deductions for contributions, and as of 2024, up to $35,000 can be rolled into a Roth IRA for the beneficiary if the funds are not used for education. The main limitation: non-qualified withdrawals incur a 10% penalty plus income tax on earnings.
UTMA and UGMA Accounts: Flexible but With Trade-offs
Uniform Transfer to Minors Act accounts are custodial investment accounts held in the child's name, managed by an adult until majority. At majority, control transfers fully to the child with no restrictions. The trade-offs: the child can spend the money on anything at 18 to 21, not just education, and earnings above $2,500 in 2025 are subject to the kiddie tax at the parent's rate, potentially reducing the benefit of the lower child tax rate.
A UTMA account in a child's name counts as the student's asset on the FAFSA, reducing financial aid eligibility at 20% of the account value versus 5.64% for parent assets in a 529. A $50,000 UTMA reduces aid eligibility by $10,000. A $50,000 parent-owned 529 reduces it by $2,800. For families who may receive financial aid, 529 plans are significantly more favorable.
Custodial Roth IRA: The Power Move for Working Teens
If a child or teen has earned income from a job, self-employment, or W-2 income, they can contribute to a Roth IRA up to their earned income or the annual limit ($7,000 in 2025), whichever is less. Parents can fund the contribution on the child's behalf as long as the child earned at least that amount. A teen contributing $5,000 per year for five years at age 15 to 19, with money growing untouched at 8% for 45 years, accumulates $285,000 at age 65, entirely tax-free.
Monthly Savings Required to Fund College Costs
Required monthly 529 contributions to cover projected college costs at 7% growth, 5% annual college inflation
| Goal | Estimated Future Cost | Monthly from Birth | Monthly from Age 5 | Monthly from Age 10 |
|---|---|---|---|---|
| In-state public 4-year | $110,000 to $130,000 future | $250 to $295 | $370 to $435 | $620 to $730 |
| Out-of-state public 4-year | $175,000 to $200,000 future | $400 to $455 | $590 to $665 | $990 to $1,115 |
| Private college 4-year | $275,000 to $320,000 future | $625 to $730 | $920 to $1,070 | $1,540 to $1,795 |
Calculate How a Child's Savings Grow Over Time
Enter monthly contributions and years to see what is waiting for them at age 18.