Gifts that grow up with the child
Many children receive a few hundred dollars a year in birthday and holiday money from relatives. Invested each year at 7%, $300 a year from birth to 18 grows to about $10,900, from $5,400 of gifts. Left alone until 30, it would be about $24,500.
A nice middle path is to invest part of each gift and let the child spend the rest, which teaches both enjoying money and watching it grow.
Which account to use
Where the money goes matters almost as much as how much. A custodial account under your state's UGMA or UTMA rules lets an adult invest on a child's behalf, but the money becomes the child's to control at the age set by state law, usually 18 or 21. A 529 plan is designed for education costs and grows tax-free when used for qualified expenses, while the account owner, usually a parent, keeps control.
Once a child has earned income, for example from a summer job, they can also have a custodial Roth IRA, funded up to the amount they earned that year. Money in a Roth grows tax-free for decades, which makes even a few hundred dollars at 16 worth a great deal by retirement. The college fund calculator helps if the goal is education.
Common questions
Can a child have a Roth IRA?
Yes, if the child has earned income, such as wages from a job. Contributions are limited to the amount earned that year, up to the normal IRA limit, and an adult manages the account until the child comes of age.
Where should I invest a child's gift money?
A 529 plan for education, a custodial UTMA/UGMA account, or a custodial Roth IRA if the child has earned income.
Who controls a custodial account?
The custodian manages it until the child reaches the age set by state law, usually 18 or 21.
This calculator gives estimates for planning. Real returns, rates and prices change, so treat the result as a guide rather than a promise. Read how we build and check our calculators.