Families have more ways than ever to invest for the future of their children. That is good news, but it can also create decision fatigue. The “best” account depends on what the money is for (education, first home, long‑term wealth), who should own and control it, and how you want taxes handled along the way.

This overview walks through five common approaches we see most often: custodial accounts (UGMA/UTMA), 529 plans, Trump Accounts, Roth IRAs for kids and investing in an adult‑owned brokerage account earmarked for a child. It also highlights the kiddie tax, gift tax basics and new Trump Account rules.

The five investment account types for kids:

1. Custodial accounts (UGMA/UTMA)
2. 529 college savings plans
3. Trump Accounts
4. Roth IRAs for kids
5. Adult‑owned brokerage accounts earmarked for a child

1) Custodial accounts (UGMA and UTMA)

What it is
A custodial account is a taxable investment account legally owned by the child, with an adult custodian managing the account until the child reaches the age specified under state law (often 18 or 21, sometimes later for UTMA). At that age, the child gains full legal control and can use the money for any purpose, not just education.

Tax treatment
Because the account is owned by the child, dividends, interest and realized gains generally appear on the child’s tax return.

For larger amounts of unearned income, the “kiddie tax” can apply:

• For 2025 and 2026, the first portion of a child’s unearned income is taxed at the child’s rate, but amounts above $2,700 can be taxed at the parents’ marginal rate.
• These rules generally apply when the child is under age 19 or under age 24 if a full‑time student, subject to other conditions.

Pros

• Flexible use: funds can later be used for education, a car or other purposes that benefit the child.
• Simple to open and invest; most major brokerages offer UGMA/UTMA accounts.
• Clearly treated as a completed gift to the child for ownership and planning purposes.

Cons

• Control automatically transfers to the child at the legal age, regardless of how financially responsible they are.
• Ongoing annual tax reporting for investment income, with potential exposure to the kiddie tax as balances grow.
• Student‑owned assets can weigh more heavily in certain financial aid formulas.

Best fit
Families who value flexibility and are comfortable with the child gaining full control at 18–21 (or later, depending on state law).

2) 529 college savings plans

What it is
A 529 plan is a tax‑advantaged tuition program designed for education savings. An adult (typically a parent or grandparent) owns the account and names the child as beneficiary; the owner can generally change the beneficiary within the family if plans change.

Tax treatment

• Earnings grow tax‑deferred and qualified withdrawals for higher‑education expenses are federally tax‑
• Federal law allows up to a capped amount of 529 funds to be used for K–12 tuition; the cap on certain cash distributions for K–12 education has increased from $10,000 to $20,000.
• Many states offer deductions or credits for contributions, with state‑specific rules and potential recapture if funds are rolled to another plan.

Pros

• Strong tax‑advantaged growth for education expenses.
• Adult owner retains control; the child has no automatic right to the account at 18 or 21.
• Beneficiary can often be changed among family members if one child does not use the funds.

Cons

• Best suited for education; nonqualified withdrawals generally trigger income tax on earnings and may incur a penalty on the earnings portion.
• Investment menus and fees vary significantly by plan.
• State tax treatment (deductions, credits and recapture) must be checked for each state.

Best fit
Often the anchor choice when education is the primary goal and the family wants tax‑advantaged growth while an adult remains in control.

3) Trump Accounts

What it is
Trump Accounts are a new federal, child‑focused, tax‑deferred savings vehicle created under recent legislation and structured to operate similarly to traditional IRAs for minors, with program‑specific rules. They are treated as traditional IRAs and cannot be designated as Roth IRAs.

Opening the account
Eligible children can have a Trump Account opened beginning July 4, 2026; financial institutions may begin accepting contributions July 6, 2026. The IRS has provided initial guidance and indicated additional regulations are forthcoming.

Seed funding
For children born between January 1, 2025 and December 31, 2028, the federal government will contribute an initial $1,000 to an eligible Trump Account as part of a pilot program once the account is properly established. Public descriptions also highlight private philanthropic commitments that may provide additional one‑time deposits for eligible children.

Contribution limits and tax treatment

• Annual contributions (from family, friends and employers combined) are capped at $5,000 per child, beginning in 2026, indexed for inflation after 2027.
• Employer contributions are limited to $2,500 per year within the overall cap, indexed after 2027.
• Contributions are not income‑tax‑deductible, but earnings grow tax‑deferred; withdrawals generally follow traditional IRA‑type rules once the account transitions.

Transition to traditional IRA and coordination with other IRAs

• A Trump Account is scheduled to convert to a traditional IRA on January 1 of the year the beneficiary turns 18, at which point standard traditional IRA rules apply.
• Contributions to Trump Accounts do not reduce or otherwise limit the beneficiary’s ability to make traditional or Roth IRA contributions in later years once they have earned income.

Pros

• Federal seed deposits for eligible children, plus potential philanthropic contributions, can meaningfully jumpstart compounding.
• Clear annual cap encourages consistent, structured contributions from multiple parties.
• Employer contributions (where available) can further boost savings.

Cons

• New program with evolving guidance; administrative and state‑conformity details still developing.
• The $5,000 annual contribution cap (plus employer portion within that cap) may be lower than some families’ long‑term savings targets.

Best fit
A capped “starter” wealth‑building vehicle to capture federal seed funding and possible employer/philanthropic contributions, typically used alongside 529s, Roth IRAs and other accounts rather than as the sole savings vehicle.

4) Roth IRAs for kids (custodial Roth IRA)

What it is
A Roth IRA for a minor is typically opened as a custodial Roth IRA, with an adult custodian managing the account until the child reaches the custodian’s age‑of‑majority requirement. The key requirement is that the child have earned income (wages or self‑employment income). Contributions are limited to the lesser of the child’s taxable compensation or the annual IRA contribution limit in effect for that year.

For 2026, the overall IRA contribution limit (traditional and Roth combined) is $7,500, again limited by taxable compensation.

Tax treatment

• Contributions are made with after‑tax dollars; there is no current‑year deduction.
• If Roth IRA rules are met, qualified withdrawals in retirement are tax‑

Pros

• Potential for decades of tax‑advantaged compounding when started in the teen years.
• Ties savings directly to the child’s own work and earned income, encouraging good documentation habits.
• Growth occurs inside a tax‑favored account, so kiddie tax on investment income is not an issue inside the Roth.

Cons

• Requires bona fide earned income; allowance alone does not qualify.
• Documentation of self‑employment income and related expenses is important.
• Not ideal for short‑term goals; rules and potential penalties limit certain early withdrawals.

Best fit
A powerful “first retirement account” for teens with jobs, when the goal is long‑term wealth rather than near‑term spending.

5) Adult‑owned brokerage account earmarked for a child

What it is
This is a regular taxable brokerage account owned by an adult, but mentally earmarked for a child’s future needs. Legally, the adult owns and controls the assets and can decide if, when and how to gift them to the child in the future.

Tax treatment

• All income and realized gains are reported on and taxed to the adult owner at the adult’s tax rates.
• Kiddie tax does not apply, because the child does not own the account.

Pros

• Maximum flexibility and control for the adult; no automatic transfer of control at 18 or 21.
• Easy to integrate with the adult’s broader investment strategy.
• It can be used for education, housing, business start‑up support or any other goal.

Cons

• Income is taxed at the adult’s rate, which may be higher than the child’s.
• The child has no legal claim to the assets unless and until a completed gift is made.

Best fit
Families prioritizing control and flexibility, particularly when they are not ready to make an irrevocable gift or set a fixed age when the child gains control.

Important gift tax basics

Most transfers into these accounts are treated as gifts to (or for the benefit of) the child, whether to a custodial account, a 529 plan, a Trump Account or assets the adult later moves from their own brokerage account.

In many cases, each donor can give up to the annual gift tax exclusion amount per child per year without using lifetime exemption or filing a gift tax return; for 2025 and 2026 that exclusion is $19,000 per donor, per recipient. Larger gifts may still be attractive but require coordination with lifetime exemption and reporting. Currently, contributions to a Trump account do not qualify for the annual gift tax exclusion which means they need to be reported on a gift tax return. There is a possibility the IRS may decide later to allow transfers to Trump accounts to avoid gift tax reporting.

How to choose: a simple three‑step framework

Step 1: Clarify the main goal

• Education as the primary focus: make a 529 plan the core education vehicle.
• Long‑term retirement savings for a working teen: add a custodial Roth IRA, within the child’s earned income and the annual IRA limit.
• Broad flexibility (car, first apartment, business seed money): consider a custodial account or an adult‑owned brokerage account, weighing ownership, control and tax rates.

Step 2: Decide who should control the money at 18–21

• Comfortable with your child having full legal control at that age: UGMA/UTMA custodial accounts fit that profile.
• Prefer to retain control into your child’s 20s and beyond: 529 plans, Trump Accounts and adult‑owned brokerage accounts keep control with the adult owner.

Step 3: Capture “free money” and then build a stack

• If your child is eligible, consider opening a Trump Account to capture the federal $1,000 seed deposit (and any applicable philanthropic or employer contributions), within the $5,000 annual contribution cap.
• Build a “stack” that fits your goals: for example, 529 for education, a Roth IRA once the child has earned income, a Trump Account for capped starter savings and either a custodial or adult‑owned brokerage account for everything else.

Even modest contributions, started early and invested consistently, can make a meaningful difference in a child’s financial future. If you want to know more, please contact your F+H tax advisor.