Smart Ways to Save for Your Kids
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As parents, we all want to set our kids up for success, emotionally, educationally, and of course, financially. But between daily expenses, college dreams, and your own retirement goals, figuring out how to save for your child’s future can feel like a juggling act.
So where do you even start? Let’s look at a couple of popular ways parents are investing for their kids and how they work.
Custodial Roth IRA vs. UGMA: What’s the Difference?
There’s no shortage of options out there, and honestly, it can get confusing fast. So here’s a quick look at two accounts you’ll might have heard a bit about: Custodial Roth IRAs and UGMAs.
A Custodial Roth IRA is a retirement account you open on your child’s behalf if they have earned income, say, from babysitting, mowing lawns, or a summer job. A UGMA (or UTMA) account, on the other hand, doesn’t require income. Anyone can contribute, and you manage the money until your child becomes an adult.
If you want a deeper look into it, Fabric has a great guide which explores the differences between a Custodial Roth IRA and a UGMA Account, going through taxes, flexibility, and even how each account might affect future college aid which is super helpful if you’re comparing both options.
Key Differences
| Feature | Custodial Roth IRA | UGMA Account |
|---|---|---|
| Who qualifies? | Child must have earned income (babysitting, part-time job) | Anyone can contribute; no income needed. |
| Contribution limits | Up to child’s earned income or annual IRA max ($7,000 in 2025) | No set annual cap, but gift-tax rules apply |
| Tax benefits | Grows tax-free, withdrawals in retirement are tax-free | Investment gains and dividends may be taxed under the ‘kiddie tax‘ rules. |
| Access to funds | Contributions can be withdrawn penalty-free; earnings locked until retirement | Child gains full control at the age of majority |
| Impact on college aid | Often less impact on FAFSA since assets are in a retirement account | Considered the child’s asset, which can reduce aid eligibility |
When Each Option Makes Sense
Here’s how to think about which account fits your situation best:
- Your child has a job: A Custodial Roth IRA is a powerful way to grow their money tax-free and get them started on lifelong investing habits.
- You want flexibility: A UGMA/UTMA account lets you gift money without any income rules attached.
- You’re saving for college: You might pair either one with a 529 college savings plan which grows tax-free when used for education
- Worried about financial aid: Because Roth IRAs often count less toward FAFSA calculations, that can make them a smart move for some families.
There’s no one right answer – it’s just about figuring out what works best for you and aligns the most with your goals and timelines.
Beyond Custodial Accounts: Other Ways to Save
Even if you’re not ready to open a custodial account yet, there are other smart ways to help your child’s money grow:
1. High-yield savings accounts for kids. Great for teaching basic saving habits while earning a bit of interest.
2. Brokerage accounts in your name. You keep full control, which can make balancing family goals easier.
3. 529 college savings plans. Contributions grow tax-free when used for education.
4. Teaching money skills early. Try simple allowance apps or goal charts to show how saving adds up.
5. Gift investments, not toys. Adding money to an account or gifting a share of stock can make birthdays and holidays more meaningful.
Tips for Raising Financially Savvy Kids
- Start early. Even small contributions can grow into something big over time.
- Automate when you can. Set up recurring transfers so saving becomes a habit, not an afterthought.
- Talk about money openly. Show your kids how you make financial decisions and they’ll learn more from watching you than any textbook.
- Check in once a year. As your child grows and goals change, adjust how you’re saving or investing.
- Don’t forget yourself. The best way to teach financial wellness is to model it – your own savings goals matter too.
