How to Invest for Your Child

Every parent’s dream is to set their children up for a life of success. With the addition of Trump accounts, the menu of investment vehicles is broader than ever. For many parents, this only makes the decision of which account to open and how much to contribute all the more confusing.

529 Accounts

529 accounts have long been the go-to option for investing in a child’s future, and for good reasons. 529s are investment accounts that grow tax-free when funds are used to pay qualified education expenses of the beneficiary.

The list of qualified expenses has grown over the years. Initially covering college tuition, room and board, books, fees, and supplies, the accounts now cover up to $20,000 in annual private K-12 tuition, trade school tuition, and fees related to registered apprenticeship programs.

As of 2024, under certain conditions, beneficiaries of 529 accounts can roll over a lifetime maximum balance of $35,000 to a Roth IRA.

If an account holder can’t find a way to use the funds in the above ways, they can always take a non-qualified distribution. This type of distribution incurs a 10% penalty and triggers income tax on the earnings portion of the distribution.

For Indiana residents, 529 plans come with an added benefit. Residents who contribute to Indiana 529s are eligible for a 20% state income tax credit on up to $7,500 of contributions per year (maximum credit of $1,500).

Custodial Accounts

Custodial accounts are accounts established for the benefit of a minor. Parents who open custodial accounts for their children retain control over the funds until the child reaches the age of majority (21 in Indiana). At that point, the child becomes the account holder.

Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts are custodial brokerage accounts that parents and guardians might consider opening for their children.

Neither account has a contribution limit. Realized gains and investment income, like dividends and interest, are taxable. Notably, custodial brokerage accounts are subject to kiddie tax rules, which state that unearned income from a dependent under age 18 (or 24 if a full-time student) that exceeds a threshold ($2,700 in 2026) is taxed at the parents’ top marginal rate.

Parents and guardians can also open custodial Roth IRAs for their minor child. As with regular Roth IRAs, contributions are equal to the lesser of the annual contribution limit ($7,500 in 2026) or the beneficiary’s earnings. Often, our clients offer to “match” their child’s contributions to the account to incentivize saving and investing.

Trump Accounts

New to the scene are Trump accounts, also known as 530A accounts. While details are still emerging, more is known now than when the accounts debuted under the One Big Beautiful Bill Act.

Children under 18 are eligible for Trump accounts, with those born in 2025–2028 qualifying for a $1,000 seed investment from the US government. Annual contributions to the account are limited to $5,000, and funds grow tax-deferred while invested in low-cost index funds.

Control over the account transfers from the parent or guardian to the child at age 18. At that time, the account is converted into a Traditional IRA, meaning IRA rules apply.

For example, distributions are allowed for qualified expenses such as education or a first home purchase (up to $10,000). Since contributions are made after tax and growth is tax-deferred, distributions of earnings are taxed as ordinary income. Non-qualified distributions are subject to a 10% early withdrawal penalty until age 59 ½.

Part of the appeal of Trump accounts is the ability to convert the Trump (IRA) balance to a Roth IRA. The major benefit here is that individuals in their initial earning years are likely in the lowest income tax bracket of their careers and can convert to lower brackets.

Since contributions to the Trump account are after-tax, only the growth portion of the IRA is taxable upon conversion to the Roth IRA. Beware, kiddie tax can come into play here as well.

Conclusion

The right account, or combination of accounts, depends on your goals for the money. Whether that’s education funding, tax benefits, flexibility, or control, each of the accounts mentioned in this article has tradeoffs. If you’re not sure how to prioritize these tradeoffs, get in touch with a trusted advisor.

About Us | Get the Bedel Blog | More Articles