Sean WilliamsInvesting for a newborn is an excellent strategy to secure their financial future. From educational expenses to eventual retirement savings, starting early can harness the power of compounding interest. There are several types of accounts parents can open for their children, each with unique benefits and considerations. This article explores custodial brokerage accounts, 529 savings plans, custodial Roth IRAs, and other options to help parents make informed decisions.
Custodial Brokerage Accounts
Custodial brokerage accounts, such as UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act), allow adults to manage investments on behalf of a child. Control of these accounts typically transfers to the child once they reach the age of majority, either 18 or 21, depending on state laws. While these accounts offer flexibility in investment choices, they can impact financial aid eligibility, as they are considered the child's assets. This could reduce financial aid by up to 20% compared to other options.
Despite this drawback, custodial brokerage accounts provide a valuable educational opportunity. Children can learn about investing by observing how their portfolio changes over time. Parents might also consider other brokerage offerings, such as youth trading accounts, which allow teens to engage with the stock market under parental supervision.
529 Plans for Education
A 529 plan is a tax-advantaged savings account specifically for educational expenses. Contributions grow tax-free, and withdrawals are also tax-free when used for qualified educational costs, such as college tuition and K-12 education expenses. One of the significant advantages of a 529 plan is its minimal impact on financial aid, affecting only about 5.64% of eligibility according to Fidelity.
Parents like Brennan Schlagbaum take full advantage of these plans by contributing regularly, aiming to cover substantial educational costs in the future. The Schlagbaums contribute $250 monthly to a 529 plan, illustrating how consistent contributions can lead to significant savings over time. Moreover, the SECURE Act 2.0 allows unused funds from a 529 plan to be rolled over into a Roth IRA, up to $35,000, further enhancing the plan's utility.
Custodial Roth IRA
For children with earned income, a custodial Roth IRA offers an excellent opportunity for tax-free growth and withdrawals. Parents can set up this account by paying their child for work, such as modeling or other small jobs. This strategy is legal under IRS rules and can be a powerful tool for building retirement savings early. Contributions to a custodial Roth IRA are limited by the child's earned income, but the potential for tax-free growth makes it a compelling option highlighted by financial experts. For more information on opening a Custodial Roth IRA, reference our article here on Custodial Roth IRAs: A Smart Investment for Kids' Future
Other Account Options
Besides the major accounts mentioned, there are several other options parents might consider:
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Custodial Savings Accounts: These accounts are straightforward and encourage saving habits, though they typically offer minimal interest. They are easy to manage and ideal for depositing gift money.
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ABLE Accounts: Known as 529A accounts, they are designed for individuals with disabilities. These accounts offer tax-free savings and contributions without affecting public benefits, applicable for various qualified expenses as noted by NerdWallet.
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Special Needs Trusts: These trusts provide financial support to individuals with disabilities without affecting government benefits, often established by a parent for future inheritance.
Each account type offers distinct benefits, and parents should consider their child's future needs and circumstances when choosing the right investment vehicle.
The Best Savings Accounts in 2025
While exploring investment options for your newborn, it's crucial to consider savings accounts as part of your strategy. Quality savings accounts provide a safe, accessible place for your child's money to grow, offering security and modest interest. As of 2025, many banks offer competitive rates and features, such as no fees or minimum balance requirements, making them an excellent starting point for parents aiming to build a stable financial foundation for their children.
Opening a Savings Account
To open a savings account for your child, parents typically need to provide their child's Social Security number and personal identification. Many banks offer custodial savings accounts that allow parents to manage funds until the child reaches a specific age. These accounts are straightforward and often come with online management tools, making it easy for parents to track contributions and growth over time.
Things To Consider
When deciding on investment and savings options for your newborn, consider factors like tax implications, financial aid impact, and the child's future financial needs. Accounts like 529 plans and Roth IRAs offer significant tax advantages, while custodial brokerage accounts provide flexibility but may affect financial aid eligibility. It's essential to balance these considerations with your family's financial goals and the lessons you wish to impart to your child about money management and investing.
Exploring the Bigger Picture of Investing for Your Child
Investing for your newborn is more than just a financial strategy; it's a commitment to their future well-being and independence. By starting early, parents can leverage the power of compound interest, setting their children on a path to financial security. With a variety of accounts available, from 529 plans to custodial Roth IRAs, there are ample opportunities to tailor investments to meet individual family needs. By fostering financial literacy and responsibility from a young age, parents not only secure their child's financial future but also instill valuable life skills. Understanding these options more fully allows parents to make informed decisions that will benefit their children for decades to come.