Ways to Invest for Children

As you journey with children from ABCs to adulthood, investing for their future can help to build a strong foundation for the years ahead. The earlier you begin, the more time the funds can benefit from the power of compounding, where money earned from investments can generate additional returns over time. 

There’s a range of investment options to consider when beginning this financial journey. Importantly, these accounts aren’t limited to parents—depending on the type of account, other family members or legal guardians can open or contribute to them as well.  

Education-Focused Accounts

Several types of college savings accounts are available to help families fund educational expenses.

• 529 Plans – Qualified tuition plans, or 529 plans, are state-sponsored investment plans that provide a tax-advantaged way to contribute to a child’s future education costs—including college tuition and qualified education expenses for higher education and private K–12 education. Any adult can open a 529 account for a designated beneficiary, and anyone can contribute, subject to contribution limits.

  There are two basic types of 529 plans: prepaid tuition plans and savings plans. Both allow earnings to grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, with some limitations. Prepaid plans also offer protection against rising tuition costs.

  Unused funds can be withdrawn without penalty to help repay student loans, up to the IRS limit per borrower. Alternatively, you might be able to roll over unused 529 funds to the beneficiary’s Roth IRA or transfer the assets to another family member’s 529 plan, subject to IRS limitations.

• Coverdell Education Savings Accounts (ESAs) – Coverdell ESAs offer tax-free growth and withdrawals for qualified education expenses. These accounts are structured as a type of trust or custodial account. Any adult can open a Coverdell ESA on behalf of a child who’s under age 18 or considered a special needs beneficiary, subject to income restrictions and annual contribution limits. Organizations, such as corporations and trusts, can also contribute. A parent or legal guardian typically serves as the “responsible individual” for the account until the child reaches the age of majority, which varies by state.

  There’s no annual withdrawal limit on qualified expenses for college or K-12 usage. You can generally roll over unused funds into a Coverdell ESA for another eligible family member before the beneficiary turns age 30. Unless they’re for a special needs beneficiary, funds must be distributed within 30 days after the beneficiary reaches age 30. 

Retirement-Focused Accounts

While education is often the primary focus when investing for children, starting retirement savings early can give young people a significant advantage through decades of compounding growth.

• Custodial Individual Retirement Arrangements (IRAs) – If a child has earned income, a designated adult can open a custodial IRA on their behalf. Contributions can’t exceed the amount the child earns each year. The designated adult controls the account until the child reaches the age of majority, which varies by state.

  Traditional custodial IRAs offer tax-deferred growth; contributions might be tax-deductible. However, earnings are taxed as income when withdrawn. Contributions to custodial Roth IRAs offer tax-free growth, and distributions are tax-free in retirement or for qualified exceptions.

• Trump Accounts – A Trump Account is a new type of traditional IRA available for children under age 18. The account is held in the child’s name, with a parent, guardian or other authorized individual serving as custodian until the child reaches age 18. Unlike other custodial IRAs, there’s no earned income requirement for opening a Trump Account. Beginning July 4, 2026, parents, family members, employers and other eligible contributors may make contributions to a child’s Trump Account.

  Children who are U.S. citizens born between Jan. 1, 2025 – Dec. 31, 2028, will also receive an initial $1,000 contribution to their account from the federal government.

  Individual contributions to Trump Accounts aren’t tax-deductible, and withdrawals are generally not permitted until the year that the child turns 18. Other special rules on contributions, investments, distributions and reporting also apply. After January 1 of that year, traditional IRA rules generally apply, and earnings are taxed as income when withdrawn.

Other Ways to Invest for Children

For those seeking maximum flexibility on how funds can be used, these investments can adapt to whatever needs arise as a child grows.

• Custodial Accounts for Minors – Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow any adult to invest on behalf of a minor, with UTMA accounts allowing greater investment flexibility.

  These custodial accounts have no withdrawal penalties, contribution limits or use restrictions beyond that the funds must be used solely for the benefit of the minor. Assets transfer to the child at age of majority, which differs by state, and can be used for any purpose.

• Savings Bonds – Series EE and Series I U.S.-savings bonds offer low-risk, long-term investments featuring tax-deferred interest growth. Any adult can purchase these bonds electronically through Treasury Direct for themselves or on behalf of a minor, with annual purchase limits.

  While not specifically designed for education, interest may be exempt from taxes if you use the bonds to pay for qualified higher education expenses (like tuition and fees), subject to certain age, income and other restrictions.

Aside from account options specifically designed for investing for children, parents or guardians might also choose to open a brokerage account in their own name with the intent of using the funds for a child’s future. Additionally, certain states offer state-seeded investment accounts for children, typically with income thresholds or other eligibility criteria. Structure, usage restrictions and tax treatment vary.

For families who have children with an eligible disability, ABLE Accounts can provide an opportunity to save for disability-related expenses in a tax-advantaged account. Rollovers to ABLE Accounts are permitted from 529 plans and Trump Accounts, with some restrictions.

Residency requirements, definitions of qualified educational expenses, and tax and investment implications vary for different types of investment accounts, so consider consulting an investment professional and a tax professional before investing.

Learn more about investing.