Starting an investment account for your minor child or grandchild can be a great way to jump-start their financial life. An investment account can help fund college costs, support a first car or home purchase, and even jump-start retirement savings. There are many account types to choose from and knowing the restrictions of each option can help you make the best choice.
Determining the best account for your minor relative begins with identifying the most important financial goals for the recipient. If college costs are the biggest priority, a 529 college savings account is likely the best fit. If retirement and/or homeownership are the most important, a Roth IRA can help provide for both goals. For other concerns, an UGMA or UTMA account give the most flexibility.
529 Accounts
These are tax-advantaged investment accounts designed for educational expenses. Every state runs their own plan and selects the custodian, the investment choices, and any state tax benefits for residents. All 529 plans, no matter the state, allow individuals to invest without paying taxes on interest, dividends, or capital gains, provided the money in the account is used for qualified educational expenses.
Qualified educational expenses include tuition, housing, fees, books, and certain supplies while at an eligible college, university, or vocational school. The Department of Education maintains a searchable list of qualifying institutions. Qualified educational expenses now also include up to $10,000 annually for elementary or high school tuition, increasing to $20,000 in 2025.
This type of account, especially if started while the beneficiary is quite young, can provide substantial tax-free growth when used for qualifying expenses. The amount you can contribute to this type of account is limited in two ways. States impose a lifetime limit on contributions which differ state to state and currently range from $235,000 in Georgia to $621,411 in New Hampshire. This limit is per beneficiary so if you have multiple children you can max out your contributions for each.
The other limit has to do with gift and estate taxes. Current tax law requires individuals to report gifts made to a single recipient valued at over $19,000 (2025) and this includes 529 contributions. Making a gift above this limit does not automatically trigger taxes but it does reduce the tax-free gifts you can make during your lifetime and could result in estate taxes at your death.
There is a special exemption to this rule for 529 accounts, however. You are allowed to “bunch” up to five years of contributions into a single year, meaning you could contribute up to $95,000 in 2025 without it affecting your gift tax lifetime limit as long as you do not make any further contributions for five years. Reporting this accurately on your taxes is an important part of this strategy.
If you make withdrawals from a 529 account without using them for qualifying expenses, penalties and taxes may apply.
Roth IRAs
Roth IRAs for minors function much like those for adults. They are retirement accounts which allow for tax-free growth when withdrawals are made after 59 ½ (with a few exceptions). The contribution limit is the lower of $7,000 (2025) or 100% of the minor’s income from employment. Minors without any income from employment cannot make contributions. This strategy is likely best for parents who pay their children through a family business, or once the minor has their first job.
Roth IRA withdrawals can be made before age 59 ½ tax and penalty free for a handful of reasons, including up to $10,000 withdrawn for a first-time home purchase. This withdrawal must be made at least five years after the first contribution to this Roth IRA. The long-term tax benefits of a Roth IRA for retirement are quite large so using funds from other sources may be preferable.
Minors can also open and contribute to a traditional IRA but since most minors do not earn enough to benefit from the traditional IRA tax deduction, this is often not a useful strategy.
UTMA or UGMA Accounts
UTMA stands for “Universal Transfers to Minors Act” and UGMA stands for “Universal Gifts to Minors Act.” These are brokerage accounts opened by an adult for the benefit of a minor. The adult serves as the caretaker of the account until the minor reaches the age of majority for this account type, which is determined by state and ranges from 18 to 25. Some states designate a single age and others designate an age range as the age of majority.
Upon reaching the age of majority, the account turns into a brokerage account and the beneficiary takes over as account owner. The account is legally theirs and they can decide to add or withdraw funds and make trades whenever desired. Prior to the age of majority, the funds can be used, but only for the direct benefit of the beneficiary.
Contributions to either an UGMA or an UTMA account count towards the gift tax exemption. There is no hard limit to contributions to this type of account like there are with IRAs or 529 accounts. Contributions can be made in cash, stocks, bonds, mutual funds, and other types of invested assets.
This can allow a parent to give their child a highly-appreciated security which the child can liquidate with less tax consequences due to their lower tax bracket. There are rules around investment income for minors so it is important to understand all tax consequences before employing this strategy.
One potential downside of these accounts is that they are considered the minor’s assets on the FAFSA (Free Application for Federal Student Aid) and can have a larger impact on potential financial aid than equivalent assets owned by a parent. If the recipient is going to apply for financial aid, an UGMA or UTMA may affect the amount of aid they receive.
UGMAs, UTMAs, and 529 accounts allow for contributions from, and ownership by, any adult. Parents or grandparents could open an account and everyone in the family - or family friends - can make contributions.
Once you decide on the type of account that matches your child or grandchild’s goals - or your goals for them - selecting the right custodian for the account is your next step. 529 accounts only have a few custodians available and Roth IRAs or UTMA/UGMA accounts can be opened with many companies. Finding the right combination of low account and trading fees with a large selection of investments is key.
Contacting one of our investment advisors at American Money Management can help you select the right account, understand the contribution limits, and help you and your minor relative understand the ins and outs of selecting investments and managing an account. Call us at (858) 755-0909 to explore the best options for you and your family.