Five ways to invest for your kids
You can set your kids up for success in many ways.
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Welcome back! It’s Douglas, once again. Heather is itching to write her next piece for The Joint Account, but she’s busy putting the final touches on our manuscript. It’s been crazy. She says hello.
This week, I am making it all about the kids. Clients ask me all the time, “How do I invest for my child?” It’s a loving, forward-thinking question, and like many other personal finance questions, there’s not just one right answer. All of these strategies have pros, cons, and tax implications you need to consider depending on your financial situation. They also depend on your priorities, goals, risk tolerance, and honestly, what you think you know (or will know) about your kid.
I should mention this from the jump. If you’re thinking of starting a family, or you’re not in a financial position to invest yet, or you’ve got very small children and just feel too buried in diapers and feeding schedules to worry about this at the moment, bookmark this newsletter as a resource to kickstart your process in the future. There will come a time when you want to know this stuff, and it’s okay if that time isn’t right this very second.
Okay, let me share some ideas for how to invest for you kids’ future, and what I like and don’t like about them.
Taxable Brokerage Account in Your Name (With a Plan to Gift Later). A very straightforward option would be to use a taxable brokerage account in your name that’s earmarked for your kid.
How It Works: You open a standard brokerage account, invest as you see fit (stocks, ETFs, etc.), and later gift the assets or cash to your child when the time feels right.
Pros: This strategy gives you full control. As the account owner, you call all the shots by deciding how the account is invested, when it’s handed over, and what it’s used for. There are no legal strings attached, and the money can fund anything—college, a car, a startup—not just specific goals like education. Again, there are no restrictions on investing, so you can pick what you like with no restrictions.
Cons: There are no tax benefits associated with strategy. Capital gains (when you sell), and dividends and interest (when paid) are taxable at your tax rate. You also need to pay attention to gifting rules when you ultimately give cash or assets to your children. In 2025, you can gift $19,000 per person per year. So, for larger accounts, gifting might have to be made across multiple years. Lastly, there’s no guarantee. Meaning that this money is not legally your kid’s until it’s gifted to them, which requires discipline on your part.
Why I Like It: Maximum flexibility and total control. You just have to plan for tax and gifting logistics.
UTMA/UGMA Accounts: The “Yours at 18” Option. Next are custodial accounts under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). Popular, but not my favorite.
How It Works: You open an account in your child’s name, manage it as the custodian, and turn it over when they hit majority age (usually 18 or 21, depending on the state).
Pros: These accounts offer some limited tax incentives. This year, the first $1,300 of unearned income (i.e. dividends, gains) is tax-free for the child. The next $1,300 is taxed at their lower rate. Then, anything above $2,600 gets taxed at your rate. Custodial accounts are typically brokerage accounts, so they can be set up easily and invested in almost anything, and there are no limits to what the funds can ultimately be used for.
Cons: The greatest disadvantage to using custodial accounts is loss of control. When you child reaches majority age, the account is legally theirs—no exceptions. They could spend it on a trip to Ibiza instead of books and tuition, and there’s nothing you can do about it. Speaking of higher education, since this becomes a child-owned asset, owning this account impacts your child’s financial aid eligibility more than parent-owned accounts would (like 529 plans, which you’ll read about below). Meaning, it’s theirs for better or worse, no matter what the implications are.
Why I Don’t Love It: Handing over a pile of cash or assets to a young adult feels like a roll of the dice. The tax perks aren’t even that great, so I’d rather maintain control longer if given the option.
Custodial Roth IRAs: The Tax-Free Powerhouse. This one’s a gem, but your child needs to earn an income to use the strategy. I’ll explain.
How It Works: You can open a Roth IRA in your child’s name with you as custodian until they’re 18. Contributions are capped at their “earned income” or $7,000 in 2025, whichever is less. “Earned income” means wages—think babysitting, a part-time job—not gifts or allowance.
Pros: What makes Roth IRAs great are their tax advantages and flexibility. Even though you need to fund contributions after taxes, the account’s earnings grow tax-free, and qualified withdrawals (made after age 59½) come out tax-free. Additionally, those original contributions can be withdrawn anytime tax-free and earnings up to $10,000 can come out penalty-free for buying their first home. There’s a lot of good stuff going on Roth IRAs, which make them great for teaching children early lessons about investing.
Cons: There’s no opportunity to contribute to a Roth IRA if your child doesn’t have any “earned income.” This makes it a tough strategy to use with little ones or non-workers. The max contribution cap of $7,000 also limits how much can go into the account. So, $2,000 from a summer job means a $2,000 max contribution. There are penalties if you take out the account’s earnings early (before age 59.5). These premature distributions are taxed as ordinary income plus a 10% penalty, though education exceptions do exist.
Why I Love It: Tax-free compounding over decades is unbeatable, and it’s a great way to kickstart financial literacy. Just confirm there’s W-2 or 1099 income first.
529 Plans: Perfect for Education. For college-bound kids, 529 plans are purpose-built savings vehicles.
How It Works: You open a state-sponsored 529 account in your name, naming your child as a beneficiary. Then, you invest in pre-set options (often mutual funds), and use it tax-free for qualified education expenses such as tuition, books, room, and board.
Pros: Like Roth IRAs, 529 plans come with some great tax advantages. Earnings in a 529 plan grow tax-deferred, and any withdrawals for qualified education expenses come out tax-free. Many plans offer state tax deductions, too. Unlike Roth IRAs, college savings plans have large contribution limits, which can exceed a total of $300,000 per beneficiary in some plans. Even though gifting limits still apply ($19,000/year per person), you can front-load five years ($95,000 per person) without reporting the gift for tax purposes. Moreover, 529 plans offer a lot of control and flexibility. The parent owns the plan, so you can change the beneficiary and can transfer plan assets to another child’s plan. There’s also the ability to rollover some of plan’s assets to a Roth IRA if certain conditions are met.
Cons: The biggest downside to 529 plans is their restricted use. Non-education withdrawals trigger ordinary income taxes and a 10% penalty on earnings. However, you can use up to $10,000/year for K-12 private education. Unlike brokerage accounts, you’re stuck with the plan’s menu of investments.
Why It’s Great: 529 plans are perfect for education goals, featuring solid tax perks and control. But don’t overfund them if you’re not sure whether college is in your kid’s future. The ROI on an expensive college degree is more speculative than ever, and I could launch into a whole diatribe about the other lucrative opportunities for young adults that don’t involve a six-figure degree. But that’s a story for another day.
Trusts: For Full Control. Finally, trusts are a more complex, tailored option for parents who want precise control and protection over investment funds and how they are used.
How It Works: You set up a trust (revocable or irrevocable) with a trustee (could be you) and your child as a beneficiary. You dictate terms—when they get the money, how it’s used, etc.—and fund it with cash, investments, or other assets.
Pros: Trusts offer the ultimate control. You get to decide the rules. Want your children to receive money at 30, or only for their education, or only to start a business? Done. You can even stagger the distributions according to different milestones. Trusts also allow for some tax planning. While revocable trusts are taxed to you, irrevocable trusts shift income to the child’s lower bracket and can insulate you from estate taxes (if over the $13.61 million exemption in 2025—champagne problems, I know). Additionally, trusts can shield assets from creditors, divorce, or reckless spending by your kid.
Cons: Generally, setup costs (legal, accounting, etc.) can run anywhere from $1,000-$5,000 depending on what is needed. There might also be ongoing management costs. Trust are complex instruments and require a lawyer and clear planning—revocable trusts you can tweak, but irrevocable trusts are locked in. Again, revocable trusts offer no tax breaks (your income, your taxes). Irrevocable trusts, which may help mitigate estate taxes for ultra-high net worth individuals, file their own tax returns and have their own high-income rates (37% over $15,700 in income in 2025). Funding them also taps that $19,000 annual gift limit.
Why I Like It: Trusts are the gold standard for control freaks. A well-drafted trust can ensure your money supports your kid exactly as you envision—college, a home, whatever—without the risk of them squandering it at 18. The tax benefits depend on the structure, but the estate planning perks are huge for high-net-worth families.
So, what’s the best choice you? Well, Heather’s favorite response: it depends! The right answer is all about your “why.”
A taxable brokerage account offers flexibility and control with no strings attached. UTMA/UGMA accounts are simple but risky at majority age. Custodial Roth IRAs shine for tax-free growth, if your kid works. 529 plans nail college savings with tax perks. Trusts give you custom control but at a cost.
Think about your goals, your kid’s future, and how much oversight you want to have. Remember that ultimately, if you’re able to do this for them, you should feel proud. You’re already giving them an advantage they’ll thank you for someday.
How are you thinking about your kids’ futures? Let’s discuss!
Last Friday, I had the privilege of having the two greatest dates in town (sorry, Heath) to the Daddy Daughter Dance. This is the first time I’ve brought Ruby, too, and if I didn’t think my heart could explode even more than before, well, I was wrong. What a night. Also, I love my dad friends. Find good dad friends.
TJA in the news
I made my regular appearance on World Wide Exchange to discuss the power of diversification and why it’s never a bad time to invest.
My X post was featured in this NBC News article about why financing your burrito with buy now, pay later programs is a terrible idea.
BTW, you can still claim your two-month free trial to Copilot, a money tracker app that helps couples stay on the same page with shared budgets, daily tracking, and smart financial insights. Use our code: JOINT2. *affiliate post*
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The content shared in The Joint Account does not constitute financial, legal, or any other professional advice. Readers should consult with their respective professionals for specific advice tailored to their situation.
as a former college graduate now a retired person. Instead of investing is college invest for apprenticeships in plumbing, electrical wiring, carpentry, car mechanic, college for medical or maybe banking.
Direct Indexing is also a really interesting tool. Can open a taxable account in your name and fund the strategy. Let the account grow tracking an index, use the tax losses against your capital gains elsewhere, and account is transferred to kids at death with step up in basis.