Few instincts run deeper than the desire to help your children, and grandchildren, get a head start, including financially. For many families, that instinct soon turns into a series of practical questions: Where should the money go? Which type of accounts should you fund, how much should go into each, and when? At Stage Harbor Financial, our guidance always begins with your financial plan. Only by intimately understanding your finances, your goals, and how the pieces fit together do we feel adequately equipped to recommend an approach that best fits your circumstances. Given our philosophy, this overview does not provide wholesale recommendations but rather builds a foundation for understanding some of the primary options for funding accounts for children, grandchildren or other minors.
The menu of accounts designed to build wealth for the next generation has never been longer, recently growing in 2026 to include Trump Accounts. We look at five primary options, each built for a different purpose, with their own rules on who can fund it, how much it can be funded with, how the money is intended to be used, and how it is taxed.
- UTMAs/UGMAs
- 529 Plans
- Custodial Roth IRAs
- Trump Accounts
- Irrevocable Trusts
Before reviewing the options available, one theme worth keeping in mind: every account has certain pros and cons. There is no universal “right answer,” only the answer that is right for your family. Your choice should be based on your family’s dynamics, its long-term goals, and how the account selected fits into your overall, and unique, financial plan. While we do not cover them here, please be aware there are also other account types available such as, Coverdell ESAs, pre-paid tuition plans, savings bonds, and more.
UTMA / UGMA Custodial Accounts
What is it? A custodial account, created under the Uniform Transfers to Minors Act (UTMA) or the older Uniform Gifts to Minors Act (UGMA), is a taxable investment account legally owned by the child but managed by an adult custodian until the child reaches the age of majority (typically 18 to 21, and as late as 25 in a few states).
Who can fund it: Anyone. There is no contribution limit nor an earned-income requirement. However, it should be noted that contributions above the annual gift exclusion ($19,000 per donor, per child in 2026; $38,000 for couples) count against your lifetime gift and estate tax exemption and will require a gift tax return.
Tax treatment: There is no special tax shelter. Earnings are taxable each year and the “kiddie tax” applies when unearned income is above $2,700 (2026). The first $2,700 of taxable income is treated more favorably and could be tax free depending on the child’s tax profile.
What can it be used for: Anything that benefits the child. Along with the ease of establishing this type of account, this flexibility is the account’s main advantage in exchange for its lack of tax benefits.
Who controls it: An adult custodian manages the account until the child reaches the age of majority, at which point the child is given full legal control. All contributions into a UTMA/UGMA are considered a completed and irrevocable gift to the child.
Worth knowing: Custodial accounts are treated as a student’s asset for financial aid calculations, which can weigh more heavily against need-based aid than a parent-owned account.
529 Education Savings Plans
What is it? A 529 plan is designed for education expenses. Contributions are made with after-tax dollars, grow tax-free, and are withdrawn tax-free when used for qualified education expenses.
Who can fund it: Anyone. However, there are limits. Each state sets this limit (currently ranging from $269,000-$621,000 per beneficiary). Contributions are considered gifts. As such, individuals interested in funding significant sums into a 529 should be aware of the gift tax implications. That is, the annual gift exclusion (currently $19,000 per person) applies to contributions made to a 529 plan. Further, a special exception to this rule exists which allows for “superfunding” the account with five years of exclusion gifts at once, or up to $95,000 per donor, so potential growth within the account may compound sooner.
Tax treatment: Growth within the account is tax-free. Withdrawals from the account are tax-free when used for qualified education expenses. Many states also offer an income tax deduction or credit for contributions made to a 529 plan account. Non-qualified withdrawals will be subject to income tax plus a 10% penalty on earnings.
What can it be used for: Qualified education expenses including college tuition, fees, books, and room and board, plus limited K–12 tuition, apprenticeships, and up to $10,000 in student loan repayment. If funds in the account are not needed for education, up to $35,000 may be rolled over into a Roth IRA for the beneficiary. To qualify for this rollover, the 529 plan account must have been in place for at least 15 years. Additionally, if the student earns a scholarship, funds can be withdrawn up to the exact amount of the scholarship without paying penalty on the earnings, but taxes would still apply.
Who controls it: Unlike a custodial account, the account owner retains control. The owner decides if, when, and how funds are used. Further, the owner has an ability to change the beneficiary to a qualified family member.
Worth knowing: Ownership of a 529 plan can have important financial aid implications. For FAFSA purposes, parent-owned 529 plans are generally more favorable than custodial UTMA accounts. Even more so, grandparent-owned 529 plans have also become significantly more attractive, as distributions from these accounts no longer reduce a student’s eligibility for federal need-based financial aid under the FAFSA.
Custodial Roth IRAs
What is it? A custodial Roth IRA is a retirement account opened for a minor and managed by an adult custodian until the child reaches the age of majority. This structure is especially powerful for a young saver with the idea of leveraging decades of tax-free compounding ahead.
Who can fund it: Anyone, but there is one key eligibility requirement: the child must have earned income, such as wages from a summer job or self-employment income. Contributions cannot exceed what the child earned. The total contribution is capped at the lesser of the child’s earned income or the annual IRA limit ($7,500 in 2026).
Tax treatment: Contributions are made with after-tax dollars, grow tax-free, and qualified withdrawals in the future are entirely tax-free.
What can it be used for: Primarily retirement. Contributions to the Roth IRA can be withdrawn anytime without tax or penalty which offer some flexibility. If earnings from the account are withdrawn prior to age 59.5, those earnings could be subject to income tax and a 10% penalty.
Who controls it: An adult custodian manages the account until the child reaches the age of majority, after which control passes to the child.
Worth knowing: Rather than establish a Custodial Roth IRA, there is also the option to establish a Custodial IRA. While it is more common to establish a Custodial Roth IRA, given the minors are more often in a relatively low tax bracket, should the minor be in a higher tax bracket, a Custodial IRA may warrant further consideration. On a separate note that is worth knowing, a Custodial Roth is not reported as a FAFSA asset, although withdrawals can count as income in a later aid year.
Trump Accounts
What is it? The newest option, Trump Accounts were created by federal legislation in 2025, with contributions beginning July 4, 2026. In essence, a Trump Account is a traditional IRA for a child under 18 but with its own distinct rules during childhood.
Who can fund it: A parent, legal guardian, grandparent, or adult sibling can establish an account. Anyone can fund it, including employers, charities, even state and local governments. Unlike a custodial Roth IRA, there is no earned-income requirement. Individuals can contribute up to a combined $5,000 per year (indexed after 2027) while employers may contribute up to $2,500 of that $5,000 contribution cap. Further, charitable and government contributions are not subject to the limit. For U.S.-citizen children born between January 1, 2025, and December 31, 2028, the federal government will also make a one-time $1,000 “seed” contribution. To qualify for the government contribution, IRS Form 4547 must be filed by the account owner.
Tax treatment: The tax treatment of distributions depends on the source of the contributions. Contributions made by family members during the designated “growth period” may be withdrawn tax-free because they were made with after-tax dollars and did not qualify for a tax deduction. In contrast, any deductible contributions made by the account owner later in life are generally subject to ordinary income tax when withdrawn. Likewise, distributions attributable to government or employer contributions, as well as any investment earnings, are also taxable as ordinary income. It is important to understand that account owners cannot choose which dollars are withdrawn first. Rather, distributions are treated on a pro-rata basis, meaning each withdrawal consists of a proportionate share of each source of funds in the account. For example, if 10% of the account balance consists of family contributions made during the growth period and the remaining 90% consists of deductible contributions, government or employer contributions, and investment earnings, then a distribution would be 10% tax-free and 90% taxable as ordinary income.
What can it be used for: Retirement. During what the US Treasury defines as the “growth period,” which is from account opening through January 1 of the year the beneficiary turns 18, withdrawals are not allowed. Upon the beneficiary turning 18, the account converts into a traditional IRA and IRA rules apply. During the child’s early working years (after they turn 18), it may be beneficial for them to convert this IRA into a Roth IRA, when they are likely in a lower tax bracket.
Who controls it: The account is locked and managed on the child’s behalf during the growth period. Once the child or beneficiary turns 18, and the account converts to a traditional IRA, the child or beneficiary gains control.
Worth knowing: There are still a few aspects of Trump Accounts that require additional regulatory guidance or clarity. One area of uncertainty is whether contributions made by individuals will qualify for the annual gift tax exclusion. If they do not, certain contributions could require the filing of a gift tax return, even if no gift tax is ultimately owed. As the Treasury Department and IRS provide further guidance, this ambiguity should become clearer. Even so, for families with eligible newborns, the $1,000 government-funded seed contribution provides a meaningful incentive to establish an account.
Irrevocable Trusts
What is it? Among the account types outlined, an irrevocable trust is both the most customizable and the most complex vehicle for setting aside assets for a child. Through an irrevocable trust, a grantor transfers assets into a separate legal entity, where they are managed by a trustee for the benefit of the child.
Who can fund it: Anyone can contribute, and there is no annual contribution limit. Given contributions are treated as completed gifts to the trust, contributions are generally subject to the annual gift tax exclusion (currently $19,000 per donor, or $38,000 for married couples who elect to split gifts, for 2026). To ensure contributions qualify for the annual exclusion, many irrevocable trusts are drafted with what is called Crummey withdrawal powers, which provide beneficiaries with a temporary right to withdraw contributions.
Tax treatment: This is dependent on how the trust is structured. Agrantor trust is generally treated as an extension of the grantor for income tax purposes, meaning all taxable income is reported on the grantor’s individual tax return. While this requires the grantor to pay the associated income tax, it also allows the trust assets to continue growing undiminished for the benefit of the child. In contrast, a non-grantor trust is a separate taxpayer that files its own tax return. From a tax standpoint, a non-grantor trust is typically more punitive, given trusts are subject to highly compressed federal income tax brackets. In 2026, trusts reach the highest 37% marginal tax rate at approximately $16,000 of undistributed taxable income, compared with roughly $640,600 of taxable income for an individual.
What can it be used for: Almost anything that the grantor would like it to, which speaks to one of the primary advantages of an irrevocable trust – its customization. The grantor can tailor the trust document to specify exactly how and when assets may be used or distributed to the beneficiary. For example, distributions can be tied to specific milestones, beneficiary requests or be spread out over the beneficiary’s lifetime. Trusts can also include provisions designed to protect assets from creditors, divorce, lawsuits, or a beneficiary’s financial inexperience.
Who controls it: The grantor establishes the rules governing the trust, while a trustee is responsible for managing the assets and administering the trust in accordance with those terms. Unlike a custodial account, which typically transfers full control of the assets to the child upon reaching the age of majority, an irrevocable trust allows the grantor to determine how, when, and under what circumstances assets may be distributed.
Worth knowing: The trade-offs are cost and complexity: the trust must be drafted by an attorney, requires its own tax filings, and generally cannot be undone once funded. For larger gifts, or for families with estate tax, asset-protection, or special-needs goals, an irrevocable trust is a valuable planning tool as well as a wealth transfer vehicle.
More Than the Accounts – The Value of Communication
As important as it is to decide which accounts to fund, and how much to contribute, that choice is only part of what shapes a child’s financial future. What may matter just as much, and in some respects even more, is communication. The conversations families have about money, saving, investing, and financial responsibility are invaluable. The accounts parents or grandparents establish can provide financial resources, but the values and habits they instill can shape a child’s or grandchild’s relationship with money for a lifetime.
Some of the work we find most rewarding at Stage Harbor Financial takes place across generations. We have had the privilege of participating in many multi-generational relationships, serving as a guide for parents as they navigate how and when to speak with their children about money. We have also worked as a direct resource for the children as they leave home, begin their careers, and start making financial decisions of their own. We strive to serve as a trusted resource and sounding board, helping them build the knowledge and confidence to become thoughtful stewards of their own financial future.
Every plan, and every one of these conversations, starts with a dialogue. If you are contemplating how to best invest in the next generation, or how to prepare them for how to manage wealth, we would welcome the opportunity to be a meaningful and helpful participant.
Every plan starts with a conversation. Start yours today with the Stage Harbor team.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Stage Harbor Financial, LLC (“Stage Harbor”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Stage Harbor and its representatives are properly licensed or exempt from licensure.
