When our children were born, in 2012 and 2016, there was never a question about whether we'd set money aside for them. My parents stretched a middle-class budget in India to put me through private school, and I wanted to give the next generation the same head start. So when it came to our own kids, the question was never whether to save. It was where that money should live.
If you've been following my fill order, the order I fund my own accounts in, you'll notice kids' accounts aren't on the list. They sit outside the pillars, the accounts that hold up my own FIRE: outside the employer match, outside the HSA, outside the backdoor Roth (the way around the Roth IRA income limit). There are loans for college. Nobody lends you a retirement. So your own accounts get funded first, and whatever you set aside for your kids comes after.
Once you're ready, the question is which account type fits: a UTMA custodial account, a 529 education plan, a taxable account in your name, or a custodial Roth IRA.
What a UTMA Custodial Account Actually Is (And Why We Chose It)
A UTMA (Uniform Transfers to Minors Act) is a custodial brokerage account where you invest on your child's behalf. (Its older cousin, the UGMA, covers only financial assets; the UTMA also allows real estate and other property.) Think of it as a taxable brokerage account with one twist: the money belongs to your child, not to you. No trust attorney, no complex paperwork. You open the account at any major brokerage, pick the investments, and manage it until your child reaches the age your state sets for the account (usually 18 or 21).
We opened our kids' accounts at the same brokerage where we already invest. They hold low-cost U.S. stock index funds with a small Bitcoin ETF slice, because I want their money working the same way mine does. Each month, when the kids decide what portion of their allowance to invest, that money goes into their accounts and we match it dollar for dollar. That habit is a big part of how I think about generational wealth.
The biggest trade-off with a UTMA is that the gift is irrevocable. Once money goes in, it belongs to the child. Each contribution counts toward the annual gift tax exclusion, $19,000 per recipient in 2026, so keep a running tally if multiple family members are contributing. At the age of majority they take full control, and you can't take it back.
That scares some parents. I've handled it by keeping contributions modest and investing just as much in my kids' financial education as in their accounts. Over the past few years, they've watched their balances grow, sometimes doubling with regular contributions, and that habit of seeing money compound is worth more than the dollars themselves.
The flexibility is what sold us: UTMA money can pay for college, a first car, a down payment, or starting a business. Nothing is locked in.
The Kiddie Tax: What It Costs and How to Stay Under It
If your child's UTMA earns dividends or capital gains, the kiddie tax kicks in. In 2026, the first $1,350 of a child's unearned income is tax-free. The next $1,350 is taxed at the child's rate, which is usually low.
Anything above $2,700 is taxed at the parent's marginal rate. Those thresholds adjust for inflation each year, so check the current numbers when you file. The kiddie tax applies until a child turns 19, or 24 if they're a full-time student. If your child's unearned income crosses the $2,700 threshold, you'll file IRS Form 8615 with their return to calculate the tax at your rate.
Tax-efficient index funds help. Broad market ETFs throw off small distributions compared to actively managed funds, so a modestly funded UTMA can stay well under the threshold. We've never come close to triggering the parent-rate bracket, because the positions we hold just don't churn out big taxable events.
There's another cost to consider: financial aid. On the FAFSA, a UTMA counts as the student's asset and is assessed at 20% of its value. A parent-owned 529 is assessed at a maximum of 5.64%. If your family will rely on financial aid, that 20% versus 5.64% difference matters. For our family, the plan is scholarships plus education loans in the kids' names, so the aid impact hasn't been the deciding factor.
When a 529 Plan Makes More Sense Than a UTMA
Here's what a 529 gives you. Contributions grow tax-free. Withdrawals for qualified education expenses (tuition, room and board, books, even K–12 tuition up to $20,000 a year) are tax-free at the federal level. Many states add a tax break on contributions.
You can use any state's plan regardless of where you live. If your state offers no deduction, compare expense ratios: independent 529 ratings come out every year, and a free comparison tool lets you line up plan fees side by side. The gap between 0.15% and 0.50% may seem small, but on a $10,000 balance growing at 7% over eighteen years, the cheaper plan delivers roughly $1,900 more. A parent-owned 529 counts as a parent asset on the FAFSA, meaning it's sheltered much more than a UTMA. And under the FAFSA Simplification Act (2024–25 aid year), distributions from grandparent-owned 529 plans no longer count as untaxed student income.
The downsides are real though: money used for anything other than qualified expenses faces income tax on the earnings plus a 10% penalty. Fund choices are limited to the plan's menu, and overfunding is a risk if your child earns scholarships or skips college. There's a front-loading option many parents miss: you can contribute up to five years' worth of the gift tax exclusion in a single year ($95,000 per parent, or $190,000 for a couple) without triggering the gift tax, as long as you elect on IRS Form 709 to spread it over five years and make no other gifts to that beneficiary during that time. The SECURE 2.0 Act softened the overfunding concern: starting in 2024, unused 529 money can roll into the beneficiary's Roth IRA, subject to a fifteen-year account minimum, a $35,000 lifetime cap, and the annual Roth contribution limit. You can also change the beneficiary to another family member or even yourself if the original plan changes.
Here's my honest take: we weighed the 529 carefully. The fund options inside the plans we looked at weren't great: higher expenses, limited choices. The state tax deduction in our case was modest. And I didn't love locking the money into education-only use when we didn't know whether our kids would follow a traditional college path. We picked the UTMA's flexibility instead, but for a family that's certain the money is for college and lives in a state with a generous deduction, a 529 is hard to beat.
Two More Options Most Parents Overlook
A third path: keep the kids' money in a taxable account in your own name. No 529 tax breaks, but no irrevocable gift either. The money stays under your control, and you decide later whether it pays for college, a gap year, or a wedding. On the FAFSA, it counts as a parent asset at the lower 5.64% rate. It's the same taxable brokerage account you already know, just earmarked for your child.
Then there's the custodial Roth IRA, which might be the most powerful account on this list for a child who earns income. Once your kid has earned income (from a job, freelance work, or a family business), they can contribute up to the lesser of their earnings or the annual limit, which is $7,500 for 2026. The account is custodial until they're adults. Even a modest contribution in someone's teens has forty or fifty years to grow tax-free inside a Roth account. That's a staggering runway.
My kids don't have a custodial Roth yet. It's the next account we'll open once they start earning real income. As soon as they have documented earnings (babysitting, lawn care, a part-time job), we'll open the account and match their contributions the same way we match their UTMA investments. For now, the UTMA carries the load.
How Much to Save Without Slowing Your Own FIRE Plan
Every dollar in a child's account is a dollar that didn't go into the employer match, the HSA, the mega backdoor Roth (the extra Roth room some 401(k) plans allow), or the backdoor Roth. Kids' accounts sit after the fill order, not inside it.
Our kids' accounts aren't a college fund. The UTMA is there to teach them the power of investing, and at 21 it becomes theirs: a nice sum for something useful, like a car. College is a separate deal. Average in-state tuition and fees at a public four-year school run about $12,000 a year, and the total cost of attendance is closer to $32,000. Four years of that is a real number, but scholarships, financial aid, and the kids' own contributions can bridge the gap.
Here's the philosophy I landed on, and it comes from my own story. When I started college in India, I paid for my education with a student loan, and paying it off was on me. Because the debt was mine, so was the pressure to make it count. I was motivated to study hard, pick a degree that would pay, and finish on time.
I've seen the opposite too: kids of immigrants in this country whose parents funded everything with no strings. Some spent years in college switching majors and left without a degree, having spent all their parents' money. That's not the plan for my kids.
So here's the deal both kids have heard from me: I'll pay a share of college, not the whole bill. Get good grades and strong achievements so you earn scholarships. Whatever scholarships you get, I'll match dollar for dollar from our savings. If there's still a gap, you take an education loan in your name and pay it off once you have a job.
That structure puts the result in their hands. They're motivated to earn merit aid, choose wisely between in-state and out-of-state, and pick a field that leads somewhere. State universities are good enough. If they really want an out-of-state school, we'll work it out, but the offer stays the same: the more scholarship money they earn, the bigger my match, and loans in their name cover the rest. Different families handle this differently: some fund a bachelor's fully but not a master's, some match loan payments, some set a fixed dollar amount. The common thread is making sure the child has enough stake to take the outcome seriously.
One automatic monthly contribution into the kids' accounts, set up after your own financial automation is running. That's the system. Consistency over time does the work, just like it does in your own investment building blocks.
Pick the Account, Then Automate It
If the money is for college and your state gives you a tax deduction, a 529 is hard to beat. If you want flexibility and you're comfortable with your child taking control at 18 or 21, a UTMA works. If you want to keep full control and decide later what the money is for, keep it in a taxable account in your own name. And once your child earns real income, open a custodial Roth IRA. The tax-free growth over decades is something no other account can match.
You can mix them: a 529 for what you're confident goes to tuition, a UTMA for everything else.
Open one account for each child once your own pillars are funded, and set up a single automatic monthly contribution from the checking account you use for bill pay.
With the accounts picked, the next question is how much risk all of this money should take, which comes down to your risk tolerance and asset allocation.
What You Need to Remember
- Fund your own 401(k), HSA and Roth accounts first: kids' accounts sit after the fill order, not inside it.
- A UTMA gives your child full flexibility but hands them control at 18 or 21, so pair it with financial education.
- A 529 offers tax-free growth for education and counts far less against financial aid than a UTMA, but locks funds into qualified expenses.
- The SECURE 2.0 529-to-Roth rollover lets you move up to $35,000 of unused 529 money into a child's Roth IRA after 15 years.
- A custodial Roth IRA gives decades of tax-free growth once your child earns income, and even babysitting or lawn care counts.
Questions I Always Get
Can I open a custodial Roth IRA if my teenager only babysits or mows lawns? Yes. The IRS requires earned income, not W-2 income specifically. Self-employment income from babysitting, lawn care, tutoring, or any legitimate work counts. Keep records of dates, hours, clients, and payments so you can document the earnings if the IRS ever asks. The contribution limit is the lesser of their total earnings or $7,500 for 2026.
What happens to the money in a UTMA if my child decides not to go to college? Nothing changes. UTMA money isn't restricted to education. Once your child reaches the age of majority in your state, they have full control and can use it for a car, a business, a down payment, travel, or anything else. That's the core advantage over a 529. There are no penalties for non-education spending.
Can I contribute to both a 529 and a UTMA for the same child? Absolutely. Some families use a 529 for the amount they're confident will cover tuition, especially if their state offers a tax deduction, and a UTMA for the rest. The two accounts have different rules, different tax treatment, and different financial aid impacts, so using both lets you hedge between the flexibility of a UTMA and the tax advantages of a 529.
Is the 529-to-Roth rollover available now, and what are the limits? Yes, it took effect in 2024 under SECURE 2.0. The 529 must have been open for at least 15 years. Rollovers are capped at $35,000 over the beneficiary's lifetime, and each year's rollover counts against the annual Roth IRA contribution limit. Contributions made in the last five years and their earnings aren't eligible for rollover, so plan ahead.
Should I prioritize my child's accounts if the market is down? No. A down market doesn't change the order: your own money still goes first, to the accounts that sit higher in the fill order. Fund your retirement pillars first. If there's still room in the budget after that, keep the kids' monthly contribution going on schedule; buying at lower prices helps their long timeline.