When it comes to saving for a child or grandchild, many people immediately think of a 529 plan. While 529 plans can be an excellent option, they are far from the only choice available.
The best savings strategy depends on your goals. Are you hoping to help with education expenses? Build long-term wealth? Maintain flexibility? Leave a financial legacy? Different account types offer different benefits, and understanding the options can help you make a more informed decision.
Here are five common ways families save for a child's future.
1. Parent-Owned Brokerage Accounts
A parent-owned brokerage account offers maximum flexibility. The parent maintains ownership and control of the account and can invest in a wide variety of investments, including stocks, bonds, mutual funds, and ETFs.
One of the biggest advantages is that there are generally no restrictions on how the money can ultimately be used. Whether the funds are needed for education, a first home, a business opportunity, or another purpose, the parent decides how and when the assets are used.
This approach may be attractive for families who value flexibility and want to avoid restrictions associated with other account types.
2. UTMA/UGMA Accounts
Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts allow assets to be set aside specifically for a child's benefit.
Once contributions are made, the assets generally become irrevocably owned by the child. The adult custodian manages the account until the child reaches the age of majority, which varies by state.
These accounts can be useful for families who want to make a permanent gift to a child while allowing the assets to grow over time. However, because the child ultimately gains control of the account, families should carefully consider whether they are comfortable with that transfer of ownership.
3. 529 College Savings Plans
529 plans are designed specifically to help families save for education-related expenses.
One of the primary benefits is the potential for tax-advantaged growth. When used for qualified educational expenses, withdrawals are generally tax-free. Many states also provide tax incentives for contributions.
In recent years, 529 plans have become even more flexible. Qualified expenses may include college tuition, certain K-12 expenses, apprenticeship programs, and in some cases, the ability to roll unused funds into a Roth IRA for the beneficiary, subject to applicable rules and limitations.
For families with a strong focus on education funding, a 529 plan often deserves serious consideration.
4. Permanent Life Insurance
Permanent life insurance can serve a dual purpose. In addition to providing life insurance coverage, certain policies build cash value that may grow on a tax-advantaged basis.
Some families purchase policies on children while they are young and healthy, potentially securing coverage that remains in place throughout their lives. Over time, accumulated cash value may be available to help fund future needs, depending on the policy structure and performance.
While permanent life insurance is typically more complex than other savings vehicles, it can be a useful tool in specific planning situations when properly designed and implemented.
5. Trump Accounts
Trump Accounts are a newer savings option designed to encourage long-term saving and investing for children.
These accounts may offer tax advantages and, in certain circumstances, eligibility for government contributions or incentives. Like many financial planning strategies, the rules surrounding these accounts continue to evolve, making it important to understand current guidelines before implementing them.
For some families, Trump Accounts may represent an additional way to begin building long-term savings for future goals.
Which Option Is Right for You?
The reality is that there is no single "best" account for every family.Common Savings Accounts for Children