Parents and grandparents looking to build a financial foundation for their children have many options. When it comes to investing for kids, the goal may vary — from funding education to long-term savings to general financial flexibility. The five strategies below are among the most commonly used ways to invest on behalf of children.
If the goal is to help fund a child’s college education, a 529 plan — named after section 529 of the Internal Revenue Code — provides a tax-advantaged way to save. Since plans vary by state, visit SavingforCollege.com to explore your options. One common type is an Education Savings Plan.
An Education Savings Plan allows contributions to be invested over time and later withdrawn to pay for qualified education expenses. These can include tuition, books, supplies, equipment and room and board for a student studying at an accredited university or vocational school. While these plans originally were exclusive to college savings, they later expanded to cover up to $20,000 per year for K–12 expenses. College expenses have no annual limit.
Earnings on a 529 plan grow tax-deferred, and withdrawals are generally federal income tax-free when used for qualified expenses. Withdrawals for non-education expenses are subject to ordinary income tax and a 10% penalty. While contributions are not deductible on your federal return, some states allow you to deduct contributions on your state income taxes.1
Contributions are considered gifts for federal tax purposes. Individuals may contribute up to the annual gift tax exclusion amount per beneficiary without triggering gift tax reporting requirements. This amount is indexed for inflation and may change periodically.
There’s no limit on the number of people who can contribute a gift to a child’s account; however, each state’s plan has an overall cap on contributions. Federal tax law allows a donor to contribute up to five years’ worth of the annual gift-tax exclusion to a plan in one year and elect to treat the contribution as made ratably over five years for gift-tax purposes.
While parents and grandparents fund most 529 plans, working teenagers can also add to their accounts. Many families avoid overfunding a 529 plan because the tax benefits generally apply only when earnings are withdrawn for qualified educational expenses.
A 529 plan owner may change the beneficiary at any time to another eligible family member without tax consequences, effectively allowing the account to be used for different students within the same family.
Prepaid tuition plans are another type of 529 plan designed to help families lock in future tuition at today’s prices. Unlike education savings plans, they generally apply only to college tuition and not to K–12 expenses.
Contributions purchase units or credits that can later be used for tuition and mandatory fees at participating colleges and universities, typically public schools in the state where the prepaid tuition was purchased. Some prepaid tuition plans guarantee future tuition only at participating schools, with different benefits if the beneficiary enrolls elsewhere.
Earnings grow tax-free, and qualified withdrawals are generally federal income tax-free. Nonqualified distributions can trigger tax on the earnings portion, and possibly a penalty.
Because prepaid tuition plans vary by state, each plan has its own method for pricing contributions. Details are available from the plan sponsor. You may view the plans available in your state at SavingforCollege.com.
Many prepaid tuition plans have residency requirements and limited enrollment periods, so families often need to sign up while the child is still young.
An Education Savings Account (ESA), also known as a Coverdell ESA, is another option families may consider when saving for education expenses. These accounts offer tax-advantaged growth similar to 529 plans but with different contribution limits and eligibility rules.
An ESA is a custodial investment account established for a child’s education expenses. Contributions are invested and can be used later for qualified education costs, including elementary, secondary and higher education expenses. These may include tuition, books, supplies and certain school-related costs.
Earnings in an ESA grow tax-deferred, and withdrawals are generally federal income tax-free when used for qualified education expenses. Contributions are made with after-tax dollars and are not tax-deductible.
The total contribution limit for an ESA is $2,000 per beneficiary per year across all accounts. Parents, grandparents or others may make contributions, but eligibility is subject to income limits for individual contributors. Contributions must generally be made by the tax filing deadline for that year.
ESAs offer more flexibility for K–12 expenses than many other education savings options, but the lower contribution limit may make them more suitable as a supplemental savings vehicle. Funds generally must be used by the time the beneficiary reaches age 30, or they may be subject to taxes and penalties.
A Trump Account is a newer, federally established investment account designed to help families save for a child’s long-term financial future. Created under federal tax law, these accounts provide another option to consider alongside 529 plans, education savings accounts and custodial investment accounts.
A Trump Account is a custodial-style investment account held in the child’s name and managed by a parent or guardian until the child reaches age 18.2 Funds are typically invested in diversified, low-cost U.S. stock index funds to support long-term growth.
In most cases, funds cannot be withdrawn before the child reaches age 18. At that point, the account is generally treated similarly to a traditional Individual Retirement Account (IRA), and the beneficiary assumes control.
Under current rules, children under age 18 with a valid Social Security number are eligible for an account.
Contributions to a Trump Account are made with after-tax dollars. The account’s investments grow on a tax-deferred basis, and withdrawals are generally subject to ordinary income tax when funds are distributed.
Because tax treatment may change over time and depends on how funds are used, individuals should consult a tax professional regarding their specific situation.
Families, friends, employers and other organizations may contribute to a Trump Account. Total annual contributions are generally limited to $5,000 per child.
For certain eligible children — typically those born between 2025 and 2028 — the federal government may provide a one-time initial contribution of $1,000 to help start the account.
Employer contributions may also be permitted within the annual contribution limit, depending on program rules.
Trump Accounts are designed for long-term savings and investing, with limited access to funds before adulthood. While they offer tax-deferred growth and broad contribution flexibility, they are not intended for short-term education funding or expenses that may arise before age 18.
Parents, grandparents or anyone who wants to start a child on the right financial foot can open an investment account in the child's name.
These accounts are commonly called UTMA or UGMA accounts, short for the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act. An adult custodian manages the account until the child reaches the age set by state law (18, 21 or even 25 in some states), at which point the child takes control of the account's assets.
With UTMA and UGMA accounts, investment earnings are taxable annually. A portion of the earnings may be exempt from federal income tax. The chart below shows the three-tier tax structure for UTMAs and UGMAs as of 2026.3
An individual can give up to $19,000 per child each year without triggering gift-tax reporting requirements. There’s no limit on the number of people who can contribute a gift to a child’s account. Children can even contribute to their own accounts — a great way to learn about investing.
A UTMA/UGMA offers tremendous flexibility with the fewest restrictions. The money can be used for college, a first car, a wedding, a down payment on a house, or a mission trip.
Each approach to investing for kids offers different benefits and considerations. Selecting the one depends on your goals, time horizon and the level of flexibility you want for future use. Whether you're focusing on education, long-term savings or broader financial opportunities, understanding how each option works can help you make more informed decisions.
If you’re ready to create a financial foundation for the next generation, learn more or open an investment account. GuideStone® is here to help.
For more information, contact us at Info@GuideStone.org or 1-888-98-GUIDE (1-888-984-8433) Monday through Friday, 7 a.m. to 6 p.m. CT.
1This should not be considered tax advice. You should consult a tax professional to discuss your unique situation.
2https://www.irs.gov/pub/irs-drop/n-25-68.pdf
3https://legalclarity.org/what-are-the-tax-rates-for-a-utma-account/
The information in this article is for educational purposes only and is provided with the understanding that GuideStone is not rendering legal, financial or tax advice. We encourage you to consult with appropriate counsel and other advisors regarding your unique financial obligations and requirements.
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• Jul 8, 2026 