💵 Money Makers: The Best Ways to Save Money for Children

Life is, we’re sorry to say, expensive.

The more you can save for your kids, and the earlier you start, the better prepared you’ll be for most of the major expenses you and your children will face down the road.

Today, we’re going to explore the various children’s expenses you’ll need to save up for, the best ways to save for these particular costs, and the additional benefits that come with helping your kids save money.

(And if you’re a kid who has found their way to this article, go grab a parent and bring them into the conversation.)

Best Ways to Save Money for Kids—Our Top Picks

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What Is the Best Way to Save Money for Kids?

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There’s no single best way to save money for kids—not exactly what you want to hear if you favor one-size-fits-all solutions. But there’s an upside: The reason there’s no single recommended way is because, depending on your goal, different saving methods have different advantages.

Do you want your child to attend college? Do you want to save up for their first car? Or do you want your kid to think really long term—retirement!—and teach them about money management along the way? What approach (and what account you need) will largely depend on your goals.

Thus, the key to saving money most efficiently is to match the right type of savings account or children’s savings plan with the proper goal. So let’s explore the main vehicles you’ll use.

What Is My Savings Goal?

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Today, we’ll be covering the four most common savings goals that parents have for their kids. Within each goal, we’ll discuss the account(s) best suited to get the job done.

Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.

1. College Savings / Qualified Education Expenses

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Here’s something you already know: College isn’t cheap. For the 2024-25 school year, the average cost of in-state tuition and fees at a public college was $11,011, according to U.S. News & World Report—and the average cost for private college was $43,505!

That’s just the direct cost, which doesn’t include the potentially sky-high cost of interest from student loans if your child doesn’t qualify for financial aid. So … if you have one or more children who might go to college, the earlier you start saving money for your kids, the better.

The good news is: Special college savings accounts enjoy tax advantages that help you maximize your money’s potential.

529 plan

A 529 plan is funded with post-tax money. That invested capital is allowed to grow tax-free, and then when you need it, you can withdraw the money tax-free—as long as the funds are used for qualified higher education expenses.

These expenses include tuition, books, computers, housing, and more. (Just note that room and board can’t go over the “cost of attendance” figures provided by the college.) They can also be used to pay back federal and private student loans. Your child doesn’t have to choose a college in the state where the 529 plan was created—they can not only go out of state, but to hundreds of foreign universities, too.

And if your child is likely to attend a private college, you can open a Private College 529 Plan, which can be used at hundreds of private universities nationwide.

Better still, “qualified higher education expenses” used to only mean “for college” (hence the frequent nickname “529 college savings”). But that evolved after 2017’s tax reform, so now, 529s can be used to:

• Pay for qualified expenses relating to K-12 public, private, and religious schools.
• Pay for college and other post-secondary education expenses, like for professional school or graduate school.

Should a child you expected to attend college chooses not to, you can change the beneficiary to another qualifying family member (in other words, pay another child’s college education expenses) without tax consequences. Alternatively, you could use the money to pay off your own financial aid or further your education.

529s were gifted some additional flexibility by the SECURE 2.0 Act of 2022. Beginning Jan. 1, 2024, 529 plan beneficiaries can roll over up to a lifetime maximum of $35,000 into a Roth IRA (though some limitations will apply).

529 plans don’t have yearly contribution limits; however, each state has its own rules for the aggregate amount you can contribute. There’s also taxation to consider. The annual gift tax exclusion rate is $19,000 per recipient per year for 2025; by that logic, you can only give up to $19,000 (or $38,000 as a couple) to one recipient’s 529 plan before facing gift tax. However, 529 plans are privy to a whopper of an exception:

“Givers can gift five years’ worth of the ($19,000 annual gift exclusion) in a lump sum,” says David Pappalardo, SVP, Advisor Solutions Group at Segal Marco, a large U.S.-based investment consultancy. “So they can give $95,000 to a 529 plan per person all at once, rather than doing it over the span of five years … and if they’re married, their spouse can do the same.” So, up to $190,000 in one fell swoop, should you be so inclined (and financially able).

529 plans do have a few limitations. The biggest one: Any money withdrawn for non-qualifying expenses is subject to a 10% tax penalty and the earnings are subject to ordinary income taxes. The penalty can be waived if the child becomes disabled, earns a tax-free scholarship, or attends a U.S. military academy, but the earnings would still be taxed. (And as long as you’re willing to pay the taxes and penalty, the money isn’t locked up, so you could still use it for a financial emergency.)

529s with Backer

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• Available: Sign up here
• Price: $1.99/contribution, $1.99/gift

A great 529 plan option to consider is Backer. Backer—a hassle-free 529 savings plan where your family and friends can play a role—has helped families save more than $20 million toward college in just minutes.

You can use the 529 plan to put your child on track to afford college, all while remaining invested in an asset class that will grow over time.

Backer users invest via a portfolio of low-cost index funds, including large-company stocks (S&P 500), small-company stocks (Russell 2000) international company shares (MSCI EAFE Index), U.S. government bonds (Barclays Aggregate Bond Index).

You can share an invite code for friends and family to make contributions to a 529 savings plan for birthdays, holidays, or other noteworthy events (like making honor roll).

Related: How to Invest Money: 5 Steps to Start Investing w/Little Money

Education savings account (ESA)

An education savings account (ESA) has many names. It used to be called an “education IRA,” but nowadays, it’s typically referred to as a Coverdell, Coverdell ESA, or just plain ol’ ESA. Whatever you call it, it’s a custodial account or trust that you create to save money for your children’s elementary, secondary, or college expenses.

Single filers with modified adjusted gross income (MAGI) of less than $95,000, and married filing jointly filers with MAGI of less than $190,000, can fully contribute to ESAs. There’s a phaseout to contributions between $95,000 to $110,000 for single filers, and $190,000 to $220,000 for married filing jointly filers.

These college savings plans have a maximum annual contribution of $2,000 from birth to age 18. Contributions are not tax-deductible, and funds must be used before age 30.

Just like 529 plans, distributions can be used for qualified education expenses. If funds are withdrawn for non-education expenses, they are subject to federal income tax and a 10% penalty. You can also roll over an ESA to another family member if necessary.

Prepaid tuition plan

There is a way for parents of college-bound children to save money on their tuition, though it’s not available in every state. By investing today’s tuition rates into a prepaid plan, kids can lock that price for the next 18 years and avoid paying increases over time.

Essentially, a prepaid tuition plan is a presale on college tuition that can be an alternative method of building college savings. The tuition program will cover college expenses for eligible recipients while they are in school and pay the participating institution(s). In the event your child goes to a non-participating college, you should still be able to use the value in the account, just not at the favorable tuition rate.

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2. Long-Term Investing / Major Purchases

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Sometimes, a parent, guardian, or other adult might have a more general savings goal in mind. For instance, maybe you have a 3-week-old granddaughter, and you know she’ll need a big pot of money in 18, or 25, or 30, or however many years, and you want to save money for when that day comes.

That’s where custodial accounts come into play.

Custodial account (UGMA vs UTMA)

Custodial accounts are financial accounts held in the name of a minor by one or more custodians.

Custodian is defined as “the person who manages assets for another” and typically refers to an adult who holds legal responsibility over the account on behalf of the child, usually their parent.

Though, a custodian can be the child’s parent, guardian, spouse of their parent, grandparents or another relative.

Custodial accounts are typically used to save and invest for a minor in hopes that they will be able to use their funds in a more productive way when they reach adulthood.

Once you have opened a custodial account, you can use it for a variety of financial goals, including college savings, retirement or general investment purposes.

Many use the account to teach some basic financial lessons about investing to their children. You can use the opportunity to discuss investment choices and outcomes, review account statements and give them a vote on major decisions.

The custodian has the responsibility to manage and invest funds accordingly with trust that they act in their best interest at all times.

If you’re thinking of opening a custodial brokerage account for your child, you’ve probably uncovered a long list of brokers offering both Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts. While these two types of custodial accounts are similar, there are important differences. So you might be asking yourself, do I pick a UGMA account or a UTMA account?

But here’s the rub: Even though all those brokers are advertising UTMA and UGMA accounts, most people really don’t have a choice. If you live in any one of the 50 states or the District of Columbia, you’re getting a UTMA account.

E*Trade (Free UGMA Custodial Accounts)

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• Platforms: Web, mobile app (Apple iOS, Android)
• Price: No monthly fees or trading commissions on stocks and ETFs through E*Trade’s Custodial Account

Most people know E*Trade as one of the leading providers of individual brokerage accounts, but you can also put the powerful platform to work saving for your child’s future, though a custodial account (and even a custodial IRA).

E*Trade’s custodial account for teens (and generally any minor) allows you to open up a custodial account that offers the chance to build a personalized portfolio through thousands of stocks, bonds, ETFs, and mutual funds, or you can have E*Trade select your holdings for you through its Core Portfolio robo-advisory service (minimum account size of $500 is needed to use this product). Further, you can choose to open a traditional custodial IRA or a custodial Roth IRA for children under age 18 who have earned income.

Just like with its individual brokerage accounts for adults, E*Trade custodial accounts offer zero-commission stock, ETF, and options trading. It also has a leg up on some platforms by offering $0-commission mutual fund, Treasury, and new-issue bond trading.

And if you want to learn more about investing—or want your young one to learn alongside you—E*Trade also boasts educational resources, including articles, videos, classes, monthly webinars, and even live events.

For a limited time, E*Trade offers a new account funding bonus (when you use reward code “OFFER26”) in the following amounts:

• $1,000-$4,999 earns $50.
• $5,000-$19,999 earns $150.
• $20,000-$49,999 earns $200.
• $50,000-$99,999 earns $300.
• $100,000-$199,999 earns $600.
• $200,000-$499,999 earns $800.
• $500,000-$999,999 earns $1,000.
• $1,000,000-$1,499,999 earns $3,000.
• $1,500,000-$1,999,999 earns $5,000.
• $2,000,000 or more earns $6,000.

To open a free E*Trade custodial account, click “Open Account” below.

Related: How to Invest as a Teenager [Start Investing as a Minor Under 18]

3. Retirement Savings

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If you want to set your child up for the very, very long term, and take the most advantage of building wealth through compounding, you can set up a retirement account for them.

The most popular vehicle is the individual retirement account (IRA), which allows you to hold stocks, ETFs, mutual funds, and other assets. And interestingly, age isn’t the determining factor when it comes to IRAs—you can set up an IRA for your child at birth, and they, in theory, could contribute to it from day one.

However, to contribute to any IRA, at any age, you must have earned income (or, if you’re married, your spouse must have earned income if you don’t). Thus, IRAs don’t really make sense for a child until they have a job or source of earned income. But once they do, they can invest in an IRA and enjoy their powerful tax advantages.

The two predominant IRA types to consider are:

Custodial Roth IRA

With a Roth IRA, you contribute after-tax funds, then that money is allowed to grow tax-free until retirement, when those funds can also be withdrawn tax-free. You can also withdraw your contributions at any time without paying taxes or penalties. If you try to withdraw profits before retirement, however, you’ll typically pay taxes and penalties, but there are a few exceptions—for instance, if you’re 59 1/2 or older and have had your account for at least five years, or if you’re withdrawing the funds for special purposes including (but not limited to) a new home or college tuition.

A custodial Roth IRA is exactly what it sounds like: a Roth IRA that an adult manages on behalf of a minor making income. A child contributes money (up to an annual limit of $7,000 as of 2025), and the custodian makes investment decisions until the account is transferred over to the child—usually at the age of majority.

A Roth IRA makes the most sense for people who think they’re currently being taxed at a rate that will be less than what they’re taxed at during retirement. That’ll usually be the case early on in your income-making life, when you don’t make a lot of money and thus fall into a low tax bracket. So, in virtually all cases, they’re the ideal retirement savings vehicle for minors, who typically work part-time jobs at most, and usually fall into the lowest tax bracket as a result.

Custodial IRA

The traditional IRA has tax benefits, too, but they’re different from Roths. You contribute pre-tax money that is then allowed to grow tax-deferred within the IRA. Taxes are only taken out when you withdraw funds; and if you take out funds before retirement, you’ll also face penalties.

The tax strategy for an IRA is the opposite of a Roth IRA: You contribute to a traditional IRA when you’re in a higher tax bracket, with the expectation you’ll be in a lower tax bracket when you retire and start withdrawing funds.

A custodial IRA makes very little sense for most minors because, as we said before, they usually fall into low tax brackets. But rare exceptions apply. A prominent child actor, for instance, would benefit from a traditional IRA, as it’s very likely they would fall in a higher tax bracket than they would in retirement. (Say, Miley Cyrus or Macaulay Culkin.)

The IRA contribution limit for 2025 is $7,000 per year.

E*Trade (Our Top Pick for Custodial IRAs)

• Available: Click “Open Account” below
• Platforms: Web, mobile app (Apple iOS, Android)

Related: 8 Best Stock Portfolio Tracking Apps [Stock Portfolio Trackers]

4. Daily Money Needs / Moderate-Sized Purchases

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Some savings goals might be a little more modest and/or a little more immediate. Perhaps you want to put money to work but have it available within just a few years. Maybe you want to teach your child how saving and spending works, so you want to pay them an allowance and give them access to an account that lets them use that money.

Kids’ checking accounts / cards

A number of accounts make sense if you want your child to have easy, day-to-day access to their money—and learn about money management along the way.

You can open a checking account, for instance, through a bank, credit union, or other depository institution, that offers joint access to both a parent/legal guardian and a minor. In addition to keeping a minor’s funds safe, a checking account usually comes with a debit card that allows them to spend their money.

Many checking accounts are only for kids age 13 through 17, like the Axos First Checking account.

You might also consider child- and teen-focused debit cards such as Greenlight or Copper, which provide banking-like services but also additional features for both parents and kids, including spending limits, account monitoring, and more. (If you want a fuller list of options, you can check out our top debit card picks, or look at only the free debit card options for children.)

Related: Best Prepaid Debit Cards for Kids + Teens

High-yield savings accounts

A basic savings account can help a minor learn how to save and keep their money safe. But if you want to earn some extra money from those savings, consider opening up a high-yield savings account for your child instead.

You guessed it: A high-yield savings account is just like a regular savings account, but with higher annual percentage yields (APYs)—typically 20 to 25 times greater than the yield on a traditional account. So, if the national regular savings account APY average was 0.05%, you could probably expect an average rate of, say, 1% from a high-yield savings account.

Is it a huge difference? No. But it’s not nothing, either. If you put $5,000 in your children’s savings account with a 0.05% APY, they’d earn $2.50 on that money in a year. In a 1%-yielding account, they’d earn $50—more than the traditional savings account would earn in a decade! And savings rates today are much higher than this theoretical example.

(Editor’s Note: APYs are typically variable, not locked in, so a high APY when you open the account might go lower or higher depending on the direction of interest rates.)

A parent or custodian can jointly own the account with their child or minor. And importantly, the funds are extremely “liquid”—you can access the money whenever you want, and you won’t pay taxes or penalties. So a children’s savings account is ideal to place money meant for everyday use, or for shorter- and medium-term purchases, such as computers or a first-car down payment.

Consider signing up for a high-yield savings account from one of the banks below, which offer competitive APYs, easy-to-use digital banking tools, and a low minimum deposit is required.

Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.

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