Best Investment Accounts for Kids

Planning for a child’s financial future is a significant step for every parent. How you choose an investment account can have a big impact on how the funds grow, their tax implications and how much control your child has.

This guide provides an overview of investment accounts for kids, evaluating the main types, potential tax benefits, investment options and long-term planning considerations.

Best Investment Accounts for Kids

• 529 Savings Plan — Best for Education Savings
• UGMA and UTMA Custodial Brokerage Accounts — Best for Teaching Financial Literacy
• Custodial Roth IRA — Best for Children Who Earn Income
• Coverdell Education Savings Account — Best for Tax-Free Growth
• Trust Funds — Best for Maintaining Control

How We Chose the Best Investment Accounts for Kids

We evaluated the best investment accounts for kids based on account types, potential tax benefits, investment options and long-term planning considerations.

Best Investment Accounts for Kids

529 Savings Plan — Best for Education Savings

A 529 savings plan is a great way for parents to save for qualified expenses, from K-12 tuition to college and student loan repayment. Think of it as a special investment account, designed to help you stash away money for qualified education expenses for your child, grandchild or even yourself. Your money can grow and be withdrawn tax-free when used for eligible school-related costs, which can add up to significant savings over time.

Key Features: 

• Account Type: 529 savings plans are state-sponsored investment accounts designed for education expenses from K-12 tuition to college and student loan repayment.

• Potential Tax Benefits: Contributions grow tax-deferred, and qualified withdrawals for education expenses are tax-free at the federal level. Many states also offer tax deductions or credits for contributions, sometimes requiring you to use your home state’s plan to qualify. 

• Investment Flexibility: While you don’t pick individual stocks, 529 plans offer a range of professionally managed investment options, often including age-based portfolios that become more conservative as the beneficiary approaches college age.

• Long-Term Planning Considerations: State-specific maximums can be high, ranging from $300,000 to $550,000. The account owner, usually the parent, maintains control over the funds, including the ability to change the beneficiary to another family member without penalty if the original beneficiary doesn’t use the funds for education. If the funds are used for nonqualified expenses, earnings are subject to income tax and a 10% penalty. Up to $35,000 of unused funds can be rolled over to a Roth IRA for the beneficiary, offering an alternative if education plans change.  

UGMA and UTMA Custodial Brokerage Accounts — Best for a Financial Headstart

If you want to set aside money for your child and you’re not thinking about higher education, Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are ideal. They’re more flexible savings tools that can give your child a financial headstart. You’ll manage the investments until the child reaches the age of majority, and then they’ll get full control of the funds to use for whatever they choose. 

Key Features: 

• Account Type: UGMA and UTMA are custodial accounts where an adult manages the assets on behalf of the minor until the child reaches the age of majority, typically 18 or 21, depending on the state.

• Potential Tax Benefits: The first portion of unearned income (investment income) is tax-free, the next portion is taxed at the child’s lower rate, and income above a certain threshold is taxed at the parent’s marginal rate. Contributions are made with after-tax dollars and are considered irrevocable gifts. They are subject to annual gift tax exclusion limits, which are $19,000 per donor in 2025.

• Investment Flexibility: The accounts allow investments in a range of assets like stocks, bonds, mutual funds and exchange-traded funds (ETFs). UTMA accounts can hold a broader range of assets, including real estate, than UGMA accounts, which are limited to financial assets. 

• Long-Term Planning Considerations: Once the money is contributed, it legally belongs to the child. The custodian cannot take the money back or change the beneficiary. At the age of majority, the child gains control of the account and can use the funds for any purpose, which may or may not align with the parent’s original intentions. Assets in UGMA and UTMA accounts are considered the child’s, which can impact their eligibility for need-based financial aid. Annual contributions are subject to gift tax exclusion limits, but there are no overall contribution limits to the account itself.

Custodial Roth IRA — Best for Children Who Earn Income

If you open a custodial Roth IRA for your child, you’re giving them a head start on their retirement savings. The key is that the child must have earned income — think babysitting, mowing lawns or a part-time job. The money they contribute — or that you contribute on their behalf — goes in after taxes and grows tax-free. When they reach retirement age, all qualified withdrawals are also tax-free. Their money can compound for decades, potentially growing into a huge, tax-free nest egg.

Key Features: 

• Account Type: A Roth IRA opened and managed by a parent or guardian on behalf of a minor who has earned income from a W-2 job or a gig like babysitting or dog walking.

• Potential Tax Benefits: Contributions are made with after-tax dollars, and qualified withdrawals are completely tax-free. Contributions can also be withdrawn tax- and penalty-free at any time, making it flexible for nonretirement needs like college expenses or a first-time home purchase.

• Investment Flexibility: Similar to adult Roth IRAs, the custodial accounts offer a range of investment options, including stocks, bonds, mutual funds and ETFs.

• Long-Term Planning Considerations: The child must have earned income to contribute, and contributions cannot exceed their earned income for the year, up to the annual Roth IRA contribution limit of $7,000 for 2025. Starting a Roth IRA early allows for decades of tax-free compounding, potentially leading to substantial wealth by retirement. The value of Roth IRAs is not usually considered in federal financial aid formulas. The minor gains control at the age of majority.

Coverdell Education Savings Account — Best for Tax-Free Growth

Think of the Coverdell Education Savings Account (ESA) as a specialized savings account designed solely for education expenses with some great tax benefits. You contribute money to it, and that money grows tax-free. When it’s time to pay for school, those funds are also completely tax-free as long as you're using them for qualified education expenses. They can cover tuition, books, supplies, tutoring and school uniforms. 

Key Features: 

• Account Type: A tax-advantaged trust or custodial account set up for paying qualified education expenses for a designated beneficiary.

• Potential Tax Benefits: Like 529 plans, contributions grow tax-free, and qualified withdrawals for education expenses, including K-12 tuition, books and supplies, are tax-free. 

• Investment Flexibility: Offers greater investment flexibility than 529 plans, allowing you to choose a wider range of individual stocks, bonds and mutual funds.

• Long-Term Planning Considerations: Income limitations for contributors are $110,000 per year for single filers or $220,000 for married couples filing jointly. Annual contribution limits are lower than 529 plans at $2,000 per beneficiary per year. The funds must be used by the time the beneficiary turns 30 or they are subject to taxes and a 10% penalty on earnings unless they’re rolled over to another eligible family member. The funds can be used for a wider range of K-12 expenses, including tutoring and technology.

Trust Funds — Best for Maintaining Control

Trust funds give you the flexibility and control to determine when your child receives the funds and how they can use the money. This can give you peace of mind if you’re concerned about a young person receiving a large sum before they’re mature enough to handle it responsibly. Trusts also offer asset protection from things like creditors or divorce for the beneficiary down the road, and they can be a powerful estate planning tool to minimize taxes on larger inheritances.

Key Features: 

• Account Type: A trust fund is a legal entity established by a grantor to hold assets for the benefit of a beneficiary. Trusts, managed by trustees, can be revocable (changeable) or irrevocable (permanent). 

• Potential Tax Benefits: Tax implications vary depending on the type of trust and how income is distributed. Trusts can offer estate tax advantages for large estates by removing assets from the grantor’s taxable estate. But trusts often have their own tax rates, which can be higher than individual rates for accumulated income.

• Investment Flexibility: Trustees typically have broad flexibility in investing the trust’s assets, depending on the terms outlined in the trust document. 

• Long-Term Planning Considerations: Control and customization are the primary benefits of establishing a trust for a child. Parents can set specific conditions for when and how the child receives assets, providing more control than other accounts. Assets held in an irrevocable trust can be protected from creditors and legal judgments against the beneficiary. Establishing and maintaining a trust can be complex and expensive, requiring legal assistance and potentially ongoing administrative fees and separate tax filings. The impact on financial aid varies. Assets in certain trusts can be less accessible than those in custodial accounts, depending on the trust’s structure. 

Choosing the Best Investment Accounts for Kids

Choosing the right investment vehicle for your child depends on your goals, the flexibility you need, and how much control you want to retain.

529 savings plans are ideal for education-focused families, offering high contribution limits and tax-free growth for qualified expenses. Coverdell ESAs serve a similar purpose but offer broader investment control and can cover a wider range of K-12 costs.

Custodial brokerage accounts under UGMA and UTMA rules offer flexibility in how the funds are used once the child becomes an adult—making them suitable for general-purpose investing and teaching financial literacy. However, they also transfer full control to the child at the age of majority, which may not be right for every family.

For kids with earned income, custodial Roth IRAs provide one of the most powerful tools for long-term tax-free growth. They offer flexibility for both retirement and milestone purchases, such as a first home or college.

Families with more complex wealth planning needs may benefit from setting up trust funds, which allow for precise control over asset distribution, inheritance terms, and estate planning strategies—but at a higher administrative cost.

By aligning your choice with your child’s future needs and your comfort level with control, you can take meaningful steps toward securing their financial independence.

Frequently Asked Questions