Saving for Your Children: Matching Accounts to Goals

For most parents, saving money for their children has traditionally centered around two goals. The first is helping pay for education, such as college or trade school. The second is helping fund major life milestones, like paying for a first car or a wedding.

But the introduction of a new account type could make a third savings goal more prominent: retirement. ‘Trump Accounts,’ introduced under last year’s One Big Beautiful Bill Act (OBBBA), are designed to give children an early foundation for long-term savings. While the program is still in its early stages, these accounts could help parents lay the groundwork for their children’s eventual retirement.

In this article, we’ll review the key savings vehicles available for children and the goals that they align with. We’ll also look at how parents can help their children get ahead without undermining their own financial security.

Education Savings: The 529 Plan  

Saving for a child’s education can help minimize their reliance on debt and maximize their earnings potential. When it comes to saving for education, one account type stands out: the 529 plan.

Contributions to a 529 plan are made with after-tax dollars. These contributions can be made up to the annual gift tax limit – currently $19,000 – before they start counting against your lifetime exemption. You can also ‘superfund’ five years’ worth of contributions in a single year, potentially allowing a married couple to make a one-time contribution of $190,000.

529 plans grow tax-free as long as distributions are used for qualified educational expenses. Notably, these accounts can be used to pay for K-12 expenses, up to a limit of $20,000 per student annually. For higher education, 529 plans can generally be used up to a school’s cost-of-attendance, and receive favorable treatment when determining financial aid under the FAFSA.

If your child ends up not pursuing additional education, there’s still some flexibility in how the funds can be used. Recent rule changes allow you to transfer the 529 plan into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000. Beneficiaries can also be changed, meaning funds can often be used for another family member.

Milestone Savings: Custodial Accounts

Beyond education, many parents seek to help their children afford major milestones. Milestones might include funding a gap year after college, helping with wedding expenses, or making a down payment on a home. Because these milestones don’t always happen on a set timeline, flexibility is key. 

As a result, UTMA accounts are often the right fit. A UTMA account essentially functions like a taxable brokerage account. In Georgia, UTMA assets generally transfer to the beneficiary at age 21, although the age of termination varies by state. 
UTMA accounts don’t have a contribution limit, but contributions above $19,000 in a single year will reduce your lifetime exemption. And while these accounts don’t have tax benefits, they do offer high flexibility in terms of withdrawals – funds can be withdrawn at any time.

With that said, withdrawals made while the account remains in the custodian’s control must be used for the benefit of the child. Parents should also be aware of the ‘Kiddie Tax’, which can subject a portion of a child’s unearned investment income to higher tax rates once certain thresholds are exceeded. Finally, UTMA assets often receive less-favorable treatment on the FAFSA, potentially impacting student aid.

Retirement Savings: Trump Accounts

Saving for education or milestones often means the money will be spent within a decade or two. In comparison, contributing to a child’s retirement savings might seem premature. But the earlier you start laying a foundation, the more time investments have to compound.

In the past, the main tool for supporting a child’s retirement was the Custodial Roth IRA. However, these accounts require minor beneficiaries to have their own earned income for parents to contribute. Because children may not start working until around age 16, the window for meaningful contributions can be narrow.

Trump Accounts, introduced under last year’s OBBBA legislation, may eventually prove more popular. Similar to Custodial Roth IRAs, these accounts offer tax-advantaged growth, but they come with no earned income requirements. Based on current legislative language and preliminary guidance, Trump Accounts are expected to have the following rules:

• Contribution Limits – Total annual contributions are capped at $5,000 per child. Parents and grandparents can contribute up to the full amount, while employers can contribute up to $2,500 of that total (on behalf of the children of their employees).

• Growth Period – During the growth period, no withdrawals are permitted, and investments are restricted to low-cost index funds tracking US equity markets. For example, an S&P 500 ETF with an expense ratio below 0.10% would likely be eligible.

• At Adulthood – When the beneficiary turns 18, Trump Accounts become governed by the same rules as Traditional IRAs. At this time, they can also be converted to a Roth IRA, creating a pathway for decades of tax-free growth. Trump Accounts may ultimately receive unique FAFSA treatment once guidance develops.

For children born between 2025 and 2028, these accounts offer an added bonus. Eligible families will receive a one-time $1,000 government contribution – a free head start on their child’s long-term savings. Combined with decades of compounding, even a small starting balance can grow substantially by the time a child reaches retirement age.

Beyond the Numbers: Behavior, Maturity, and Fit

So far, we’ve looked at the financial implications of each account type. But selecting the right savings vehicle isn’t just an economic decision.

Behavioral factors matter too. For example, funding a custodial account could mean handing over six figures in accessible assets to your child when they’re 21. Whether or not they’ll be mature enough to handle that responsibility is something that no formula can predict. 

Trump Accounts add to these considerations. At 18, the account becomes governed by the same rules as a Traditional IRA – giving the beneficiary full control over whether to convert, withdraw, or leave the funds invested. That flexibility is a benefit, but it also places a consequential financial decision in the hands of a young adult.

For parents planning to save for their children’s future, these accounts often work best when paired with ongoing financial guidance and honest conversations about money. Sometimes, the education that children receive in the process can be worth more than any account balance.

Conclusion: A Secure Foundation

Wanting to save for your child’s future is an admirable goal. But it’s important to pursue that goal from a secure foundation.

When oxygen masks drop on a flight, passengers are instructed to put their own mask on before assisting others. The same logic applies to saving for your children. Trying to establish your child’s financial security before your own can result in difficult trade-offs down the road, especially if circumstances change – such as higher-than-expected medical costs or a prolonged market downturn.

For most parents, becoming a burden on their children is the last thing they want. As a result, it’s essential to ensure that your generosity doesn’t undermine your financial security. Should you have questions about how these accounts may fit into your family’s financial plan, we invite you to contact our office to start the conversation.