Smart Ways to Save Money for Kids: From a Financial Advisor

Raising children is a rewarding journey—but there’s no denying it comes with a hefty price tag. The Brookings Institution says it costs about $310,605 to raise a child until age 18. This amount does not include college costs.

While this number may seem large, saving small amounts regularly can make a big difference over time. Looking at different savings options can help you use your money wisely. Some accounts also teach kids about saving and investing. Here are several options to consider when saving for your child's future.

Savings Account

A savings account is a simple and accessible way to start building financial security for your child. Parents can open an account at a bank, either traditional or online. The adult can be the main or joint account holder.

Contributions can be made through deposits or automatic transfers, making it easy to grow the balance over time. Additionally, these accounts are insured by the FDIC for up to $250,000 per depositor.

Many savings accounts let parents and children access funds. It is important to monitor account activity to teach good money habits. The best savings accounts for kids have no minimum balance, no monthly fees, and competitive interest rates.

Certificate of Deposit (CD)

If you are ready to save for a longer time, a CD can be useful. CDs offer a fixed interest rate over a specified term, typically yielding higher returns than regular savings accounts. However, liquidity is limited, as withdrawing funds before the term ends may incur penalties.

Minors cannot open CDs on their own. A parent or guardian must open one for them using a custodial account.

Custodial Account (UTMA/UGMA)

Custodial brokerage accounts, such as those under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA), allow adults to invest for a child’s future. These accounts can hold stocks, bonds, mutual funds, and other assets, making them a versatile option for long-term growth.

While there are no contribution limits, large gifts may trigger federal gift tax considerations. Contributions are irrevocable, meaning the funds belong to the child and must be transferred to them at adulthood (ages 18-25, depending on state law). Withdrawals must benefit the child, and while these accounts are taxable, the tax treatment is generally favorable for minors with no earned income.

Traditional Brokerage Account

For parents who want to retain control over the funds beyond their child’s legal adulthood, a traditional brokerage account may be a better fit. This type of account remains in the parent's name, allowing full discretion over withdrawals and investments. When the time is right, assets can be transferred to the child, keeping in mind potential tax implications and gift tax rules.

529 College Savings Plan

A 529 plan is a tax-advantaged way to save for education expenses. While contributions are not federally tax-deductible, many states offer tax benefits. Funds grow tax-deferred, and withdrawals for qualified educational expenses are tax-free.

Additionally, 529 plans offer flexibility. Unused funds can be transferred to another family member’s 529 or used to pay off student loans (up to $10,000). Starting in 2024, up to $35,000 from a 529 plan may be rolled over into a Roth IRA for the beneficiary, subject to conditions.

Roth IRA for Kids

Though typically used for retirement, a custodial Roth IRA can be an excellent long-term savings vehicle for children with earned income. Contributions grow tax-free, and you can take out money without a penalty for qualified expenses. These include education and buying your first home. Since children generally have lower tax liabilities, contributions to a Roth IRA offer an opportunity for tax-free growth over decades.

Trusts

Trusts provide an additional layer of financial planning and control. While often associated with high-net-worth families, they can be beneficial for anyone looking to safeguard a child’s financial future.

Revocable trusts allow modifications over time, whereas irrevocable trusts are fixed and may offer tax advantages. Special types, such as education trusts or special needs trusts, ensure funds are used for designated purposes. However, trusts can be costly to establish, with legal fees ranging from $1,000 to several thousand dollars.

Final Thoughts

Saving for your child’s future is one of the most impactful financial decisions you can make. Whether you choose a simple savings account, an investment-focused custodial account, or a tax-advantaged 529 plan, each option serves a unique purpose. Beyond setting aside money, teaching your children about financial responsibility will set them on the path to lifelong financial wellness.

Sources:

https://www.fidelity.com/learning-center/smart-money/how-to-save-money-for-kids

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.