How Can I Save Money for My Child?

Saving money for a child’s future provides a strong financial foundation for education, a first home, or a head start in adulthood. Various financial vehicles offer distinct features and benefits, allowing families to choose options aligning with their goals and financial situations.

Basic Savings and Bonds

Basic savings mechanisms offer accessible funds and typically carry lower risk profiles than investment accounts.

Savings Accounts

Savings accounts offer a straightforward way to accumulate funds and maintain liquidity. A parent or legal guardian must be present to open an account for a minor. Required documentation includes identification for both the parent and child (e.g., driver’s license, birth certificate), along with their Social Security numbers. Banks offer joint or custodial accounts, allowing parents to oversee funds until the child reaches the age of majority. Interest earned is generally taxable and may be subject to “kiddie tax” rules if it exceeds certain thresholds.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) offer a low-risk savings option with a fixed interest rate for a predetermined term, ranging from months to years. A parent or guardian must open a CD for a minor, typically through a custodial account. The adult manages the CD, but funds legally belong to the child and transfer to them at the age of majority. Opening a CD requires Social Security numbers for both parent and child, plus proof of address. Interest earned is taxable income and may be subject to “kiddie tax” rules once it exceeds certain thresholds.

Savings Bonds

Savings bonds, issued by the U.S. Department of the Treasury, represent a secure way to save, backed by the full faith and credit of the U.S. government. Series EE and Series I bonds are the two primary types available. These bonds can be purchased electronically through TreasuryDirect.gov. When buying for a child, a parent or adult custodian can establish a “Minor Linked Account” within their TreasuryDirect account to purchase and manage bonds for the child. The child’s full name and Social Security number are required for the purchase.

Series EE Bonds

Series EE bonds typically earn a fixed interest rate and are guaranteed to double in value if held for 20 years. Interest is exempt from state and local income taxes, and federal income tax can be deferred until the bond is redeemed or reaches final maturity, up to 30 years. A tax advantage exists if proceeds are used for qualified higher education expenses, potentially allowing for federal tax exclusion on the interest, subject to income limitations. For this exclusion, bonds must be registered in the name of the parent or spouse, not the child, and the owner must be at least 24 years old when issued.

Series I Bonds

Series I bonds are designed to protect against inflation, with their interest rate adjusting periodically based on a fixed rate and the inflation rate. Like EE bonds, interest on Series I bonds is exempt from state and local taxes, and federal tax can be deferred until redemption or maturity. The education tax exclusion also applies to Series I bonds used for qualified higher education expenses, under similar conditions as Series EE bonds. The maximum purchase limit for electronic Series EE and Series I bonds is generally $10,000 per Social Security number per calendar year.

Education Savings Plans

Specialized savings vehicles offer distinct tax advantages for funding educational expenses. These plans are designed to encourage saving for college and, in some cases, K-12 education.

529 Plans

529 plans, also known as Qualified Tuition Programs, are investment accounts specifically designed to help families save for future education costs. There are two primary types: prepaid tuition plans, which allow the purchase of future tuition at current prices, and college savings plans, which involve investing contributions in various portfolios. The most notable benefit of 529 plans is their tax-advantaged growth; earnings grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. Qualified education expenses encompass a broad range of costs, including tuition, fees, books, supplies, equipment, and room and board for students enrolled at least half-time. They also cover up to $10,000 annually for K-12 tuition and expenses related to apprenticeship programs and student loan repayments.

Opening a 529 Plan

Opening a 529 plan typically involves selecting a state-sponsored plan. While plans are state-sponsored, individuals are generally not restricted to their home state’s plan and can choose any state’s program. The enrollment process requires providing personal information for the account owner and the designated beneficiary, including Social Security numbers. Contributions can be made regularly or as lump sums. There are no federal annual contribution limits, only cumulative limits set by each state, which can be substantial (often over $300,000 to $500,000).

529 Plan Flexibility

A significant feature of 529 plans is their flexibility regarding beneficiaries. The account owner can change the beneficiary to another eligible family member without tax consequences if the original beneficiary decides not to pursue higher education or has remaining funds. This ensures that the savings can still be utilized for educational purposes within the family. Funds within a 529 plan are typically managed by a professional investment firm, offering various investment options ranging from conservative to aggressive, allowing account owners to select a strategy that aligns with their risk tolerance and time horizon.

Coverdell Education Savings Accounts (ESAs)

Coverdell Education Savings Accounts (ESAs) are another tax-advantaged option for education savings, structured as trust or custodial accounts. Contributions to a Coverdell ESA are made with after-tax dollars, but the earnings grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. A key distinction of Coverdell ESAs is their broader definition of qualified expenses, which includes not only higher education costs but also K-12 elementary and secondary school expenses like tuition, fees, books, supplies, and even tutoring.

Coverdell ESA Limitations

There are specific limitations associated with Coverdell ESAs. Annual contributions are capped at a relatively low amount per beneficiary across all Coverdell ESAs. Additionally, there are income limitations for contributors; individuals or couples exceeding certain modified adjusted gross income (MAGI) thresholds may have reduced or no eligibility to contribute. To open a Coverdell ESA, individuals typically work with a financial institution, providing necessary personal and beneficiary information. The account must be established before the beneficiary reaches a certain age, and the funds generally must be used by the time the beneficiary reaches age 30, with some exceptions.

Custodial Investment Accounts

Custodial investment accounts provide a framework for holding assets on behalf of a minor, granting the child control of the assets upon reaching the age of majority. These accounts are established under specific state laws, primarily the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).

UGMA and UTMA Accounts

UGMA and UTMA accounts function as custodial brokerage accounts, allowing assets to be gifted and held for a minor without a formal trust. UGMA accounts hold financial assets like cash, stocks, bonds, and mutual funds, while UTMA accounts are broader, holding a wider range of assets, including real estate and intellectual property. When funds are contributed, the gift is irrevocable. The custodian, typically a parent or legal guardian, controls the account and makes investment decisions until the child reaches the age of majority (usually 18 or 21, depending on the state), at which point assets legally transfer to the child, who gains full control.

Opening an UGMA or UTMA Account

Opening an UGMA or UTMA account involves working with a brokerage firm or financial institution that offers these account types. The custodian will need to provide their personal identification, Social Security number, and contact information, along with the minor’s name, date of birth, and Social Security number. Contributions can be made by anyone, including parents, grandparents, or other relatives. There are no federal contribution limits to these accounts; however, large gifts may be subject to gift tax rules if they exceed the annual gift tax exclusion amount per donor per recipient.

Kiddie Tax

A significant tax consideration for custodial accounts is the “kiddie tax.” This rule aims to prevent parents from shifting income-generating assets to their children to take advantage of lower tax brackets. Under the kiddie tax rules, a portion of a minor’s unearned income, such as interest, dividends, and capital gains, may be taxed at the parent’s marginal tax rate rather than the child’s lower rate. For example, for 2025, the first segment of a child’s unearned income might be tax-free, the next segment taxed at the child’s rate, and any unearned income above that threshold taxed at the parent’s rate. The specific income thresholds for the kiddie tax are adjusted annually by the IRS. While the child is the legal owner of the assets, the custodian is responsible for managing the account and ensuring any tax obligations are met.