Guide to Saving Money for Kids: Which Account Matches Your Goal?

Raising children comes with mounting costs. Whether you’re thinking about immediate needs or decades down the road, having a clear savings strategy makes a meaningful difference. The challenge isn’t just deciding whether to save, but figuring out how to save money for kids in ways that align with your specific objectives. Different financial vehicles offer different tax benefits and flexibility—and matching the right one to your goal is the real game-changer.

Understanding Your Timeline and Objectives

Before diving into specific accounts, ask yourself: What are you saving for, and when will you need the money? Are you building a college fund? Planning for a first car? Thinking generationally about long-term wealth? Your answer shapes everything. A high-growth investment account might make sense for retirement savings 30 years away, but a liquid savings account is better if you need funds in 2-3 years.

Daily Spending and Short-Term Purchases

Not every savings goal requires a specialized investment account. Sometimes children simply need practical tools to manage money they’re already earning or receiving.

Kids’ Checking Accounts and Debit Cards

A straightforward checking account—jointly held with a parent—gives kids hands-on experience managing their cash. Banks like Chase offer accounts starting at age 6, while specialized apps like Greenlight and Copper go beyond traditional banking. These platforms let parents set spending limits, monitor transactions, and help kids develop financial literacy. For teens building credit, secured credit cards like Step allow them to establish a credit history while earning rewards on purchases.

High-Yield Savings Accounts

The math on high-yield savings is surprisingly compelling. If a traditional savings account earns 0.05% annually, a high-yield account might earn 1% or more—a difference that compounds. On $5,000, that’s $50 per year instead of $2.50. Banks like CIT Bank offer competitive rates with minimal deposit requirements, making them ideal for medium-term goals like a down payment on a first vehicle.

The main advantage: These funds remain fully accessible whenever needed, with no taxes or penalties. The main limitation: The returns won’t rival what long-term investments can generate.

Long-Term Growth and Major Life Events

Once you shift your thinking beyond immediate needs, investment accounts unlock tax advantages designed for growth over years or decades.

Custodial Accounts (UGMA and UTMA)

Custodial accounts offer maximum flexibility. A parent or guardian manages the account until the child reaches adulthood (typically age 18, 21, or 25 depending on state law). Funds can technically go toward any expense that benefits the child—not just education.

There are two structures: UGMA accounts exist in all 50 states and hold financial assets like stocks, bonds, and ETFs. UTMA accounts (available in 48 states) can hold those same assets plus physical property like real estate or vehicles. You can contribute up to $17,000 annually per individual ($34,000 per married couple) without gift tax consequences. Apps like EarlyBird make setting up UGMA accounts simple, offering five strategic ETF portfolios at varying risk levels.

One caveat: Because these are irrevocable gifts in the child’s name, they count against financial aid eligibility. FAFSA assumes 20% of custodial account assets are available for college—versus only 5.64% for 529 plans.

College-Focused Savings Plans

College represents the biggest education expense families face. For the 2022-23 school year, average in-state tuition at public universities reached $10,423, while private institutions averaged $39,723 per year. Special college savings vehicles exist precisely because of these numbers.

529 Plans: The Tax-Advantaged Standard

A 529 plan lets you invest after-tax dollars that grow entirely tax-free. When withdrawals occur for qualified education expenses—tuition, room and board, textbooks, computers, or federal student loan repayment—no federal tax is owed.

Originally designed for college, 529s expanded after 2017 tax reform. Now you can use them for K-12 private school tuition, graduate school, professional certifications, and even apprenticeships. In 2024, new flexibility arrived: The SECURE 2.0 Act allows rolling up to $35,000 from a 529 into a Roth IRA (subject to certain conditions).

The contribution advantage is substantial. While there’s no annual limit, the IRS allows a special election: You can gift five years’ worth of the annual exclusion ($17,000 × 5 = $85,000) in a single lump sum per person, or $170,000 as a married couple. Withdraw funds for non-qualified expenses, and you’ll pay income tax plus a 10% penalty on the earnings.

Platforms like Backer simplify the process, allowing grandparents and relatives to contribute to the same 529 plan, and the funds flow into low-cost index fund portfolios spanning U.S. stocks, international equities, and bonds.

Education Savings Accounts (ESA / Coverdell)

An ESA or Coverdell account is a more modest option, with a $2,000 annual contribution limit from birth until age 18. You’ll find income restrictions: Single filers with modified adjusted gross income under $95,000, and married couples under $190,000, qualify fully. Funds must be used by age 30, and like 529s, non-education withdrawals trigger income tax plus a 10% penalty.

Prepaid Tuition Plans

Some states allow parents to lock in today’s tuition rates through a prepaid plan, protecting against future price increases. The tradeoff: This approach sacrifices flexibility if your child doesn’t attend a participating institution.

Long-Horizon Wealth Building: Retirement Accounts

For parents thinking 30, 40, or 50 years ahead, introducing children to retirement savings early harnesses compounding’s power. The surprising fact: You can open a Roth IRA at birth—as long as the child eventually has earned income to justify the contribution.

Custodial Roth IRA

A custodial Roth IRA is managed by a parent on behalf of a minor with job income. The child contributes up to $6,500 annually (2023 limit), funds grow tax-free, and withdrawals at retirement occur tax-free. Contributions themselves can be withdrawn anytime without penalty.

Why Roth over traditional? Most children work part-time and fall into the lowest tax bracket. Contributing today in a low-tax environment means decades of tax-free growth. This is the retirement account that makes sense for virtually all working minors.

Brokerages like E*Trade streamlined the process, offering custodial Roth IRAs with zero-commission stock and ETF trading. You can build your own portfolio across thousands of securities or use their robo-advisory service. Educational resources on the platform help both parent and child understand investing fundamentals.

Custodial Traditional IRA

A traditional IRA accepts pre-tax contributions that grow tax-deferred; taxes apply only upon withdrawal. This structure rarely makes sense for minors—except rare cases like child actors earning substantial income, who’d benefit from lowering their current tax bracket.

Putting It Together: Creating Your Savings Strategy

How to save money for kids effectively boils down to this: Match the account type to the timeline and goal. Daily expenses and moderate purchases under 5 years? A checking account or high-yield savings account works. College within 15-18 years? A 529 plan maximizes tax efficiency. Generational wealth and retirement? Custodial accounts and IRAs build over decades.

The beauty of having multiple options is that you’re not locked into one approach. A family might use a 529 for college, a Roth IRA to teach early retirement investing, and a custodial UGMA account for flexible long-term growth. Start early, choose the right vehicle, and compounding becomes your most powerful ally.