Accounts for the Kids: The Full Comparison for Parents and Grandparents
A client asked last week which account he should open for his granddaughter, and the answer probably wasn’t what he expected. We told him there isn’t one. There are five, and the right combination depends entirely on what he’s trying to accomplish.
This is part 2 of our conversation with Taylor Wolverton, CFP®, Enrolled Agent, our Director of Financial Planning and Tax Strategy on this topic. New Trump accounts just became available, and parents and grandparents we’re talking to want to know how they stack up against the accounts that already exist: 529 plans, UTMA and UGMA custodial accounts, plain brokerage accounts, and Roth or traditional IRAs for kids.
Here’s the short version before we get into the detail. There’s no single best account. Different accounts match different goals, and often the smartest strategy uses two or three accounts together.
Trump Accounts: The New Option, and What Makes It Different
Trump accounts exist for one purpose: to start retirement savings for children immediately, from birth if you want. Anyone under 18 can have one, and contributions from all sources combined, parents, grandparents, family friends, are capped at $5,000 a year.
Unlike a Roth IRA, a Trump account does not require the child to have earned income. That single rule addresses the biggest problem with the “open your kid a Roth IRA” advice you see all over social media, which we’ll get to in a minute.
Money inside a Trump account grows tax-deferred. The child can’t touch it until they turn 18, and even then, distributions are restricted to specific uses, the same categories the IRS allows for traditional IRAs: education, a first home purchase, disability. Outside of those, the account is built for long-term accumulation, meaning the real payoff doesn’t show up until retirement age.
Taylor gave us some example numbers to consider. Contribute the full $5,000 a year for 18 years and you’ve put in $90,000. Invest that in a diversified U.S. equity strategy at a historical return somewhere in the 6 to 10 percent range, and by the time that child turns 18, you could be looking at a few hundred thousand dollars sitting in that account. Convert it to a Roth IRA at that point, ideally while your child or grandchild is in the lowest tax bracket of their life, and you’ve handed them decades of tax-free compounding before they’ve even started their first job.
That conversion feature matters. When the account holder turns 18, the Trump account converts to a Roth the same way a traditional IRA does, no age limits and no cap on the amount. Pay tax on the earnings at that point, ideally while it’s cheap, and let it run.
529 Plans: Built for Education, With More Flexibility Than Before
Compare Trump Accounts, 529 plans, Roth IRAs, and custodial accounts to find the best strategy for saving and investing for your child’s future. Distributions come out completely tax-free, but only when the money goes toward qualified education expenses.
529s are managed at the state level, so your investment options and any state tax benefit depend on where you live. In North Carolina, there’s no state deduction or credit for contributions, so the tax advantage here shows up entirely on the back end, when your child or grandchild takes tax-free distributions for school.
There’s no real contribution limit on a 529 beyond the annual gift tax exclusion, which currently sits at $19,000 per person. Earned income isn’t required, and you can invest more broadly than the Trump account allows, not just U.S. equities.
The objection we hear about 529s is the one we’ve wrestled with for our own kids: what if they don’t go to college? For years, that was a real problem. Unused 529 funds meant taxes and penalties on the way out. Now, 529 balances can be rolled into a Roth IRA for the beneficiary under certain conditions, which took out a lot of the risk of overfunding one of these accounts. That flexibility helps the 529 earn a spot in many family funding strategies, even paired with a Trump account rather than instead of one.
UTMA and UGMA Custodial Accounts: Full Flexibility, Zero Control at 18
Custodial accounts, UTMAs and UGMAs, work like a standard brokerage account with one major difference: once your child hits the age of majority, 18 in North Carolina, they take full ownership. Whatever’s in there is theirs, with no restrictions on how they use it.
Contributions are irrevocable the moment you make them, from any contributor, and there’s no tax benefit to you for putting money in. The account can invest broadly, and any dividends, interest, or capital gains generated inside it are taxable to the child, who becomes responsible for filing a return to report that income.
The trade-off here is trust, plain and simple. You’re funding an account for years, and at 18, control transfers completely, no strings attached. That’s fine if you’re confident in how your child will handle it. For some families, that uncertainty is reason enough to lean toward a 529 or Trump account instead, where either the purpose is restricted or the parent retains more say for longer.
Standard Brokerage Accounts: Maximum Control, No Restrictions, Full Tax Exposure
A plain brokerage account is the most flexible option on this list because it isn’t tied to your child at all unless you decide to name them a beneficiary. You keep full control, you can withdraw any amount at any time, and there’s no restriction on what the money gets used for.
The cost of that flexibility is tax exposure. Since the account stays in your name, the earnings are taxed at your rate, not your child’s, which for most parents in their peak earning years is a real disadvantage compared to the other options here. If your intention is simply to build a pool of assets you’ll hand off later, on your own terms, this is the tool, but you’re trading tax efficiency for control.
Roth and Traditional IRAs for Kids: Powerful, But Only If They’ve Earned Income
You may have seen the social media ads: “Want to build generational wealth for your child? Open them a Roth IRA.” What those ads leave out is the requirement that makes the whole thing possible in the first place: your child needs earned income to contribute.
That’s a significant requirement. Unless your child has a part-time job, or you’re paying them a legitimate wage through your own business, there’s no way to fund this account for them. A five-year-old doesn’t have earned income. A 16-year-old with a summer job does, and contributions are limited to whatever they actually earned, subject to the IRS’s annual contribution caps.
Once that requirement is met, the math is powerful. Roth contributions grow completely tax-free, and since your child is likely in the lowest tax bracket they’ll ever see, this is about as efficient as compounding gets. A traditional IRA works similarly but flips the tax treatment, a deduction now, taxes on distributions later.
So again, the Trump account conversion strategy is worth understanding. It gives you a path toward that same tax-free compounding outcome, starting from birth, without waiting for your child to land a job.
Before You Open an Account: FAFSA and Financial Aid
Before you pick an account, or a combination, think about how much money will end up sitting in your child’s name and what that could mean for financial aid down the road. Some of these accounts affect a family’s FAFSA calculation more than others, and a heavily funded custodial account can make a child look wealthier than the family actually is on paper, which can work against them when it’s time to apply for aid.
If college financial aid is part of your planning, this is worth serious consideration before you fund any of these accounts aggressively.
So Which One Should You Actually Choose?
There’s no perfect investment. There are only trade-offs, and the closest thing to a perfect strategy is combining a handful of tools that each do one thing well.
For a lot of families, that looks like this. A 529 handles education funding, with the new Roth rollover flexibility as a safety net if the child’s plans change. A Trump account builds long-term, tax-advantaged wealth from birth, with a Roth conversion waiting at 18. And once your teenager has actual earned income, a Roth IRA for kids becomes the third leg, capturing decades of tax-free growth while they’re in the lowest bracket they’ll ever be in.
None of this is a one-size answer, and it shouldn’t be. It comes back to what you’re actually trying to accomplish for your kids or grandkids, and how these pieces fit into the rest of your financial plan.