How to Save Money for Your Child’s Future

Saving money for a child’s future provides a financial foundation that can support various life milestones. Many families embark on this journey with diverse aspirations, aiming to provide a financial foundation that can support various life milestones. This proactive approach can help alleviate future financial burdens, allowing children to pursue education, establish independence, or navigate significant life events with greater security. Establishing savings early can leverage the power of compounding, where earnings on investments generate their own returns over time, potentially leading to substantial growth.

Education-Focused Savings Accounts

Families often prioritize saving for educational expenses. These vehicles are designed to help accumulate funds while providing favorable tax treatment, making them a popular choice for financing future schooling from kindergarten through higher education. Understanding the nuances of each option is important for maximizing potential benefits.

529 Plans

A popular choice for education savings is the 529 plan. This investment vehicle allows contributions to grow on a tax-deferred basis, meaning no federal income tax is paid on the earnings as long as withdrawals are used for qualified education expenses. When funds are withdrawn for purposes such as:

Tuition
Fees
Books
Supplies
Equipment

They are also exempt from federal income tax. Additionally, room and board expenses are considered qualified if the student is enrolled at least half-time at an eligible educational institution.

Two types of 529 plans exist: prepaid tuition plans and college savings plans. Prepaid tuition plans allow the purchase of future tuition credits at current prices, offering a hedge against rising tuition costs at specific state institutions. College savings plans function like investment accounts, with funds invested in various options such as mutual funds or exchange-traded funds. While contributions to a 529 plan are made with after-tax dollars and are not federally tax-deductible, many states offer income tax deductions or credits for contributions, especially if contributing to an in-state plan.

The definition of qualified education expenses for 529 plans includes college costs. Beyond college costs, up to $10,000 per year per beneficiary can be withdrawn tax-free for tuition expenses at elementary or secondary public, private, or religious schools. Furthermore, 529 funds can cover expenses for computer technology, equipment, internet access, and qualified apprenticeship programs. Account owners maintain control over the assets, and the beneficiary can be changed to another qualified family member without tax consequences. Special gift tax rules allow for accelerated gifting, where an individual can contribute up to $95,000 (or $190,000 for married couples) in a single year, treating it as if spread over five years, without incurring federal gift tax.

Coverdell Education Savings Account (ESA)

Another option for education savings is the Coverdell Education Savings Account (ESA). Similar to 529 plans, contributions to a Coverdell ESA are not tax-deductible, but the earnings grow tax-deferred and withdrawals are tax-free if used for qualified education expenses. A key distinction is that Coverdell ESAs have a lower annual contribution limit, capped at $2,000 per beneficiary for all contributions combined.

Coverdell ESAs offer flexibility for qualified expenses. These can include:

Tuition
Fees
Books
Supplies
Equipment
Academic tutoring
Special needs services

Eligibility to contribute to a Coverdell ESA is subject to income limitations; for 2025, the ability to contribute is gradually reduced for single filers with a modified adjusted gross income (MAGI) between $95,000 and $110,000, and for married couples filing jointly with a MAGI between $190,000 and $220,000. Funds in a Coverdell ESA must be used by the time the beneficiary reaches age 30.

Custodial Savings Accounts

Custodial savings accounts allow adults to save and invest on behalf of a minor, with the assets legally belonging to the child. These accounts are established under specific uniform acts adopted by individual states, ensuring a consistent legal framework for managing assets for minors. While they offer flexibility in asset types, they also come with tax implications and control considerations.

Two types of custodial accounts exist: Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. An UGMA account is used for financial assets, such as:

Cash
Stocks
Bonds
Mutual funds

An UTMA account allows for the transfer of various types of property, including:

Real estate
Intellectual property
Fine art
Financial assets

Both account types involve an adult serving as the custodian, managing the assets for the benefit of the minor until they reach the age of majority.

Any gift made into an UGMA or UTMA account is irrevocable; the assets legally become the child’s property. The custodian manages the funds for the minor’s benefit. When the child reaches the age of majority, which varies by state, typically ranging from 18 to 21 years old, though some states allow UTMA custodianships to extend up to age 25, control of the assets must be transferred to them. Once transferred, the former minor has discretion over how the funds are used.

A significant tax consideration for custodial accounts is the “kiddie tax.” This tax applies to a child’s unearned income (such as interest, dividends, and capital gains) if it exceeds certain thresholds. The first $1,350 of a child’s unearned income is tax-free due to the standard deduction for dependents. The next $1,350 is taxed at the child’s lower income tax rate. However, any unearned income above $2,700 is taxed at the parent’s marginal tax rate. This rule applies to children under age 18 at the end of the tax year.

General Savings and Investment Vehicles

Beyond education-specific or custodial accounts, general savings and investment vehicles can be utilized to build financial resources for a child’s future. These options offer tax advantages, liquidity, and control, providing flexibility for different financial goals. Understanding these broader categories can help families diversify their savings approach.

United States Savings Bonds

United States savings bonds, Series EE and I bonds, represent a low-risk savings option. These bonds are exempt from state and local income taxes, and federal income tax on the interest can be deferred until the bond is redeemed or matures. For EE bonds, the interest is fixed. I bonds offer a variable interest rate that adjusts with inflation. Both types of bonds must be held for at least one year before redemption, and a penalty of three months’ interest is applied if redeemed before five years. The annual purchase limit for electronic EE and I bonds is $10,000 for each series per person, while paper I bonds can be purchased up to $5,000 using a federal tax refund. These bonds can be gifted and count towards the recipient’s annual purchase limit.

Roth IRA for a Minor

A Roth IRA for a minor is a long-term savings tool, offering flexibility for earlier withdrawals. A child can contribute to a Roth IRA if they have earned income from employment, such as wages from a job or self-employment income from activities like babysitting or lawn mowing. For 2025, the maximum contribution is $7,000, or 100% of the child’s earned income, whichever amount is less.

Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free. Contributions can be withdrawn at any time, for any reason, without taxes or penalties. Additionally, earnings can be withdrawn tax-free and penalty-free for specific qualified purposes, such as a first-time home purchase, after a five-year holding period and if certain conditions are met.

Standard Taxable Brokerage Account

Parents can also utilize a standard taxable brokerage account held in their own name to save for a child’s future. This approach offers flexibility, as there are no restrictions on how the funds can be used once withdrawn. The parent retains full control over the account and its investments. However, any capital gains, dividends, or interest generated within this account are taxed at the parent’s marginal income tax rate each year, which can lead to higher tax liabilities compared to tax-advantaged accounts. This vehicle is often chosen when the primary goal is flexibility and control, rather than specific tax benefits tied to education or retirement.

Practical Savings Strategies

Beyond selecting savings vehicles, adopting strategies and cultivating financial habits are important for building a financial foundation for a child. Integrating savings into daily financial routines and involving children in the process can aid the accumulation of funds and the development of financial literacy. Consistent effort and clear objectives contribute to achieving long-term financial goals.

Incorporating Child-Related Savings

Incorporating child-related savings into the household budget is important. Treating savings as a non-negotiable expense, similar to a utility bill, helps ensure consistency. Implementing automatic transfers from a checking account to dedicated savings or investment accounts makes saving regular. This disciplined approach ensures that funds are set aside before other discretionary spending occurs, transforming saving into a routine rather than an afterthought.

Leveraging Unexpected Money and Gifts

Leveraging unexpected money and gifts can boost savings. Monetary gifts received for birthdays, holidays, or other special occasions can be directed into a child’s savings account. Windfalls such as tax refunds, work bonuses, or inheritance can be allocated to long-term savings goals. This strategy allows families to accelerate their savings progress without impacting their regular budget.

Teaching Financial Literacy

Teaching financial literacy to children from a young age instills valuable habits that can last a lifetime. Establishing an allowance system provides children experience managing money, allowing them to learn about saving, spending, and charitable giving. Engaging children in discussions about financial goals, such as saving for a desired toy or future experience, helps them understand delayed gratification and consistent saving. This practical education empowers children to become responsible financial stewards.

Setting Clear Savings Goals

Setting clear, measurable savings goals and regularly tracking progress helps maintain motivation and focus. Whether the objective is a specific amount for college, a down payment for a first home, or a general nest egg, defining the target provides a clear aim. Periodically reviewing account balances against these goals allows families to see their progress, make necessary adjustments to their savings plan, and celebrate milestones, reinforcing the importance of their efforts.