How to Get Money for Kids: Financial Strategies

Financial planning for children involves a range of strategies aimed at securing their future and providing immediate support. Understanding the various avenues available, from long-term investments to government assistance and earning opportunities, helps families build a robust financial foundation. These approaches offer different benefits, catering to diverse needs and financial goals for a child’s upbringing and development.

Saving and Investment Options for Their Future

For families looking to build a financial foundation for their children, several dedicated savings and investment accounts offer distinct advantages. These accounts serve various purposes, from funding education to providing general financial resources, each with specific rules regarding contributions, tax treatment, and access.

One popular option for education savings is the 529 plan, a tax-advantaged savings plan for education expenses. Any adult can open a 529 plan, naming a beneficiary. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, which include tuition, fees, books, and room and board for higher education, as well as up to $10,000 per year for K-12 tuition. Non-qualified withdrawals are subject to income taxes and a 10% federal penalty on earnings. To set up a 529 plan, the beneficiary’s date of birth and Social Security Number are required, and these plans can be obtained through state programs or financial institutions.

Under the SECURE 2.0 Act, unused 529 funds may be rolled over into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000, provided the 529 plan has been open for at least 15 years and other conditions are met.

Another education-focused account is the Coverdell Education Savings Account (ESA), formerly known as an Education IRA. A Coverdell ESA is a federally sponsored, tax-advantaged trust or custodial account for qualified education expenses, encompassing both K-12 and higher education. An adult can open a Coverdell ESA for any student under 18, or for a special needs beneficiary. Contributions are not tax-deductible. Funds grow and are withdrawn tax-free if used for qualified education expenses.

The annual contribution limit is $2,000 per beneficiary across all ESAs, and individuals with modified adjusted gross income above certain thresholds (e.g., $110,000 for single filers or $220,000 for joint filers) may have their contribution ability reduced or eliminated. Assets in a Coverdell ESA must be withdrawn by the time the beneficiary reaches age 30, unless they are a special needs beneficiary, or the earnings portion will be taxable and subject to an additional 10% tax. To establish a Coverdell ESA, proof of the beneficiary’s birth, name, and Social Security Number are needed, and these accounts can be opened at banks, financial institutions, or brokerage firms.

For general savings and investment, Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are common choices. These are custodial accounts where an adult manages assets for a minor until the child reaches the age of majority, which is 18 or 21, though some states allow UTMA custodianships to continue to age 25. Contributions to UGMA/UTMA accounts are irrevocable gifts to the minor, meaning the assets legally belong to the child. There are no contribution limits, but contributions exceeding the annual gift tax exclusion (e.g., $19,000 per person in 2025) can incur federal gift tax for the donor.

The income generated within these accounts is taxed at the child’s lower tax rate up to a certain amount (e.g., the first $1,350 of unearned income is tax-free in 2025, and the next $1,350 is taxed at the child’s rate), with amounts exceeding that threshold taxed at the parent’s rate, often referred to as the “kiddie tax.” UGMA accounts hold financial assets like stocks, bonds, and mutual funds, while UTMA accounts can hold a broader range of assets including real estate and patents. These accounts are available through banks and brokerage firms.

Government Support and Tax Credits

Beyond direct savings, government programs and tax credits offer significant financial assistance to families with children, providing resources through reduced tax liabilities or direct benefits.

The Child Tax Credit (CTC) is a federal benefit designed to reduce the tax burden for families raising children. For the 2025 tax year, eligible families can claim up to $2,200 per qualifying child, with a maximum refundable portion of $1,700 per dependent. To qualify, a child must be under 17 at the end of the tax year, be a son, daughter, stepchild, eligible foster child, or a descendant of one of these, and live with the taxpayer for more than half the year. The child must also have a valid Social Security Number, and the taxpayer must claim the child as a dependent on their tax return. Income limitations apply, with the full credit available to single filers with modified adjusted gross income up to $200,000 and joint filers up to $400,000; the credit amount phases out above these thresholds. Taxpayers claim the CTC by completing Form 1040 and attaching Schedule 8812.

Dependent Care Flexible Spending Accounts (FSAs) provide another avenue for financial relief, allowing employees to set aside pre-tax dollars for eligible dependent care expenses. This benefit is offered through an employer and is intended to cover costs that enable the employee and their spouse to work or seek employment. Eligible expenses include care for children under 13 years of age, such as babysitting, daycare, preschool, and summer day camps. It can also cover care for a disabled spouse or dependent of any age who regularly spends at least eight hours a day in the household and is incapable of self-care. To receive reimbursement, employees submit claims with itemized receipts or statements from the care provider, detailing service dates, the dependent’s name, type of service, and amount billed. These accounts offer tax savings by reducing taxable income, as contributions are deducted before taxes are calculated.

Empowering Kids to Earn and Manage

Beyond structured savings and government support, children can directly acquire and manage money, fostering early financial literacy. This involves practical methods for earning and learning fundamental principles of money management.

Allowances and payment for chores provide initial opportunities for children to earn their own money. These experiences teach the connection between effort and reward, helping children understand the value of their household contributions. As children grow, they can engage in small jobs outside the home, such as babysitting, pet sitting, or yard work for neighbors, further developing their earning capacity.

Once money is acquired, teaching children how to manage it becomes a practical lesson. A simple budgeting system should be introduced, encouraging them to divide their money into categories like saving, spending, and sharing. This helps them understand the different purposes of money and practice delayed gratification. For instance, setting a savings goal for a desired item can motivate consistent saving habits.

Managing gift money, whether from birthdays or holidays, also presents a valuable learning opportunity. Instead of immediate spending, children can be guided to consider saving a portion, spending some, and potentially donating another part. This approach reinforces the concept of financial responsibility and introduces the idea of using money for both personal enjoyment and broader impact. These early experiences with earning and managing money lay a foundation for future financial independence.