Helping Your Grandchildren Financially: Which Account Is the Best Choice?

One of the most common questions I hear from grandparents is:

"I'd like to put some money aside for my grandchildren. What's the best way to do it?"

The answer depends on what you want the money to accomplish.

• Should it pay for college?

• Help buy a first home?

• Build retirement savings?

• Or simply give them flexibility as adults?

Four of the most common options today are:

• Cash Gifts

• 529 Plans

• UTMA accounts

• Trump Accounts

Each has very different rules, tax treatment, and tradeoffs.

Option 1: Cash Gifts

Sometimes the simplest approach is the best one.

Rather than opening a special account, grandparents can simply give cash or write a check directly to a grandchild.

How it works

Cash gifts can be made at any time and used for virtually any purpose, including:

• College expenses

• A first home

• A wedding

• Starting a business

• Paying off debt

• Building savings

• Everyday living expenses

Unlike a 529 plan, UTMA, or Trump Account, there are no restrictions on how the recipient ultimately spends the money.

Contribution limits

There is no limit on how much you can give.

However, gifts above the annual federal gift tax exclusion generally require filing a federal gift tax return ($19k per person is the limit as of 2026).

For married couples, each spouse can make a separate annual exclusion gift, effectively doubling the amount that can be gifted without using any lifetime exemption.

In most cases, no gift tax is actually owed, as the excess simply reduces your lifetime estate and gift tax exemption.

Tax treatment

Cash gifts are not taxable income to the recipient.

Likewise, the person making the gift generally does not receive an income tax deduction.

If the recipient invests the money, future earnings or capital gains are taxed under the normal tax rules.

Advantages

• Extremely simple.

• No account setup or ongoing maintenance.

• Complete flexibility in how the money is used.

• No investment restrictions.

• Can be combined with other gifting strategies.

Potential drawbacks

• Once the gift is made, you no longer control the money.

• The recipient can spend it however they choose.

• The money does not receive the special tax advantages available through accounts such as 529 plans or Trump accounts.

Option 2: 529 College Savings Plans

A 529 plan is generally the best choice if your primary goal is helping pay for education.

How it works

You contribute after-tax dollars into an investment account that grows tax-deferred.

As long as withdrawals are used for qualified education expenses, all investment earnings can be withdrawn completely tax-free.

Qualified expenses generally include:

• College tuition

• Room and board (subject to IRS rules)

• Required books and supplies

• Graduate school

• Many vocational and trade schools

• Up to $10,000 per year for K-12 tuition

• Certain apprenticeship expenses

Recent law changes also made 529 plans considerably more flexible.

Subject to IRS requirements, unused funds may eventually be rolled into the beneficiary's Roth IRA

The account generally must have been open at least 15 years, annual Roth contribution limits still apply, and lifetime rollover limits are capped at $35k per beneficiary under current law.

Contribution limits

There is no federal annual contribution limit, although certain 529 plans set lifetime contribution limits and gifts are still subject to the federal gift tax rules described above.

One unique benefit is the ability to front-load five years of annual gift tax exclusions into one contribution ($19k x 5 years = $95k per person as of 2026)

This allows grandparents to make a very large contribution immediately while treating it as though it were spread over five years for gift tax purposes.

Advantages

• Tax-free growth when used for qualified education.

• You retain control of the account.

• Beneficiaries can usually be changed to another family member.

• Potential Roth IRA rollover flexibility if funds aren't needed for education.

• Many states provide an income tax deduction or credit for contributions.

Potential drawbacks

• Tax benefits are largely tied to education spending.

• Non-qualified withdrawals generally result in ordinary income tax plus a 10% penalty on the earnings portion.

• Investment choices are typically limited to the options offered by the plan.

Option 3: UTMA (Uniform Transfers to Minors Act) Accounts

A UTMA account is often the most flexible way to save for a child.

Unlike a 529 plan, the money can ultimately be used for virtually any purpose that benefits the child.

How it works

A parent or grandparent opens the account as custodian and manages the investments until the child reaches the age of majority (typically age 18 or 21 depending on state law).

At that point, the money legally becomes the child's property, and they gain complete control over the account.

They can use it for:

• College

• Buying a home

• Starting a business

• A wedding

• Investing

• Or anything else they choose

Tax treatment

Unlike a 529 plan, there is no special tax shelter.

Investment income is generally taxed annually.

For smaller balances, some investment income may be taxed at the child's tax rates.

However, once annual unearned income exceeds the "kiddie tax" thresholds, additional investment income may be taxed at the parents' marginal tax rate.

Contribution limits

There are no specific annual UTMA contribution limits.

However, contributions are considered gifts and are subject to the normal federal gift tax rules described above.

Advantages

• Broad investment choices.

• No restrictions on how funds are ultimately spent.

• Can be used for virtually any future goal.

Potential drawbacks

• No tax-free growth.

• Assets generally count as the child's asset for financial aid purposes.

• Once the child reaches the applicable age, you cannot prevent them from spending the money however they choose.

Option 4: Trump Accounts

Created under the "One Big Beautiful Bill Act", Trump Accounts are one of the newest savings options available for children. They are designed to encourage long-term investing beginning at birth.

How they work

Eligible children born during the pilot period may receive a $1,000 federal seed contribution if the account is established and the applicable requirements are met.

Parents, grandparents, employers, nonprofits, and others may also contribute.

During childhood:

• Investments are generally limited to low-cost U.S. stock index mutual funds or ETFs.

• Most withdrawals are prohibited before the child reaches adulthood.

Beginning in the year the beneficiary turns 18, withdrawals generally follow rules similar to those for traditional IRAs, including taxation of distributions and potential early-withdrawal penalties unless an exception applies.

Contribution limits

Private contributions are currently limited to $5,000 per year, adjusted for inflation in future years. The federal pilot contribution is separate from this limit.

Tax treatment

Contributions are made with after-tax dollars (no tax deduction for the person contributing).

Investments grow tax-deferred rather than tax-free.

Withdrawals are taxed similarly to distributions from a traditional IRA, which are subject to income taxes when distributions are taken.

Also similar to a Traditional IRA, Trump Accounts can be converted to Roth IRAs once the child reaches age 18 under current rules, enabling multiple decades of tax-free compound interest from that point forward. (income tax is due at the time of conversion)

Advantages

• Government seed funding for many eligible children.

• Encourages decades of long-term investing.

• Simple investment options with very low fees.

• Can be converted to a Roth IRA once the child reaches age 18 (with tax due at the time), which would provide multiple decades of tax-free growth from that point forward

Potential drawbacks

• Much less flexibility before age 18.

• Withdrawals are generally taxable rather than tax-free.

• New program with evolving guidance.

• May not provide as much tax benefit as a 529 if education is the primary goal.

Which One Is Best?

If your goal is...	Best choice
Paying for education	529 Plan
Allowing grandchildren to use funds for any purpose once age 21	UTMA
Allowing grandchildren to use funds for any purpose whenever they choose	Cash Gifts
Long-term retirement-style investing from birth	Trump Account

Final Thoughts

There isn't a single "best" account for every family.

Many grandparents actually use more than one strategy. 

For example, they might contribute to a 529 plan to help with future education costs, fund a UTMA account that can eventually help with a first home or starting a business, and also adding to a Trump Account for very long-term tax advantaged growth.

The right choice depends on your family's goals, your tax situation, and how much flexibility you'd like your grandchildren to have in the future.

Before making significant gifts, it's also worth considering how these accounts fit into your overall retirement, estate, and tax planning strategy.

Want To Discuss This Individually?

1 - For clients: Call or email me any time as always.

2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com

This article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor.