Saving for Grandchildren
John Yeigh | May 2, 2026
OUR FIRST GRANDCHILD recently arrived, which naturally has us thinking about the smartest ways to build a strong financial foundation for her future. In 2019, I wrote Take a Break, which outlined saving strategies on behalf of children. Since then, the landscape has changed with the introduction of Trump accounts and Roth-conversion pathways for 529 accounts.
Families have four tax-advantaged savings approaches on behalf of young children plus the Roth IRA option once the child has earned income – 529 education savings account, a Uniform Gift to Minor (UGM) custodial account, a Coverdell account, and the new Trump account. Each option offers a different mix of tax benefits, contribution requirements and withdrawal rules.
529 Accounts
Pros
- Tax-free growth when used for qualified education expenses
- High gift-tax contribution limits: $19K per contributor per year (indexed)
- New ability to convert up to $35K into a Roth IRA for the beneficiary
Cons
- Relatively complex with penalties and taxes on non-qualified withdrawals
- Limited, state-approved investment options
- Risk of underutilization if the child does not pursue qualifying education
Caveats
- Technology and AI could significantly reduce education’s cost structure in the future
- Roth conversions are capped at $35K lifetime
- The 529 must be open 15 years, and contributions must age 5 years before conversion
- Conversions require the beneficiary to have earned income (i.e. they could Roth anyway)
- Annual Roth contribution limits still apply (e.g., $7.5K in 2026), so completing the full $35K conversion would take five years
UGM Custodial Accounts
Pros
- Brokerage account where up to $2.7K of unearned income can be tax-free each year
- High gift-tax contribution limits: $19K per contributor per year (indexed)
- Broad investment flexibility — stocks, bonds, funds, etc.
- Few restrictions on how funds may be used for the child’s benefit
- Potential for low taxes on capital gains, but subject to marginal “kiddie tax” at parent’s rates until tax-independency or age 24
Cons
- Higher income or capital gains could trigger the kiddie tax at the parents’ marginal rate
- Assets count as the child’s for financial-aid purposes
Caveats
- Custodians have some ability to spend down the account for legitimate child expenses if the child is a wild-child in the later teen years
Coverdell Accounts
Pros
- Tax-free growth for qualified education expenses
- More flexible investment choices than most 529 plans
Cons
- Low contribution limit: $2K per year plus income limits restrict who can contribute
- Essentially irrelevant today given the expanded options within 529 plans
Trump Accounts
Pros
- $1K government seed deposit for children born 2025–2028
- Contribution limit of $5K per year in 2026, indexed to inflation
- Parent employers may contribute up to $2.5K per year (also indexed)
- Tax-deferred growth with Roth-conversion opportunities beginning at age 18
- No earned-income requirement for Roth conversions
- Roth conversions are ideal in low-income years starting after age 18 once the child has transitioned to tax-independency of parents or at age 24 when “kiddie taxation” ends. Early tax independence could even be a combined Roth plus student financial-aid strategy
- Potential to convert large account values over several years at relatively low tax rates (potentially marginal 10-12% tax-rates, but averaging less due to the standard deduction).
Cons
- Investment options limited to low-cost indexed stock funds (not necessarily a drawback)
- Penalty-free withdrawals must wait until age 59½, but the accounts could be advantageous even including penalties
- Limited custodian control and intervention possibilities if the teen is a wild-child
Caveats
- If Roth conversions are not undertaken during the child’s low-income years, a UGMA invested to capture long-term capital gains tax-rates may outperform a Trump Account taxed at ordinary income tax-rates
- Watch this space as future adjustments or eligibility changes are possible
In effect, the 529 is a two-decade college savings program having some complexity and withdrawal limitations; the UGM is a reasonably flexible, 18-30-year college or house downpayment savings program; and the Trump account is a somewhat inflexible, sixty-year retirement accelerator.
Resulting Playbook
Here is our family’s intended playbook for tax-advantaged accounts in the grandchild’s name:
- Parents’ retirement account fundings remain their top priority – 401K’s at a minimum up to the match, HSAs with their triple tax advantages, and Roths as long as eligible within income limits.
- A Trump account has already been initiated to secure the free $1K government seed contribution – grows to potentially $2.6K at age 18 after penalties and taxes.
- Limited 529 funding has also been initiated to start the 15-year clock for potential later Roth conversions.
- The family’s next priority is to fund the Trump account which starts at $5K later this year. Maximizing the Roth conversion opportunity will require ~$116K of contributions (at 3% inflation) over 18 years which we grandparents intend to help fund. I estimate the Roth converted Trump account could grow to ~$2 million of tax-free money at age 60 (6% growth) assuming early-age Roth conversions, and the Wall Street Journal projects as much as $3 million (link likely paywalled).
- The subsequent priorities are to start UGM taxable account and 529 account contributions in parallel to perhaps initial levels of about $35K each. This may take our family some years depending upon available resources for contributions.
For the UGM account, a balance of $35K should capture a sizeable chunk of the annual $2.7K tax-free income limit by investing in high-yield income alternatives. For the 529 account, $35K aligns with the Roth conversion limit.
On a personal note, we had extremely positive UGM outcomes with our children. We saved taxes for two decades, and each child used the ~$60K balance as down payments on their first house shortly after college. Due to the 529’s withdrawal rigidities and potential technology impacts, we are unlikely to fund the 529 to the max.
- We will skip Coverdells as the alternatives offer ample savings opportunity in the child’s name ($200K+).
- Depending upon spare resources available for gifting, we can always reassess future contributions.
That’s our plan, and we’re sticking to it…. until something changes.
John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.
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John,
Thanks for sharing a well thought out plan. I used Fidelity’s 529 (New Hampshire) plan for my 2 son’s education. When the grandkids came along, I reviewed the 529 plans and the Fidelity plan (New Hampshire) still seemed the best fit. One son had a business conflict so the fund so we used was the second-best choice for his two kids, the my529 Plan (Utah) I was living in PA then and contributions were state tax deductible. I am now in Michigan and contributions are only deductible if you use the State of Michigan designated plans.
Down the road we may give more to the grandkids, but the Trump plan is not completely defined by the US Treasury or IRS. Too many unknowns at this point. See article from Ed Slott’s IRA newsletter.
Grandparents Should Be Very Careful Before Opening Trump Accounts – Ed Slott and Company, LLC
Will look forward to your experience with the program.
Completely agree on the T accounts. They’re gimmicky, a work in progress, and colored in politics. I see no advantage in being an early adopter – these may change considerably in coming years. Little upside in investing blindly here.
Harold – thanks for this.
Just to be clear for our family, we do not advocate that Grandparents open, manage, and remain custodians of any of these accounts on behalf of their grandchildren. We believe the parents are best positioned to manage the accounts, and our child has opened the accounts on behalf of their child – we have openly discussed with both parents on how we plan to help supplement future funding of the child accounts they are managing. We also have no concern that the grandparent fund sourcing is not separately reflected.
On the IRS form, there is no place to select a trustee such as Fidelity or Vanguard. Instead the form just states ” You’ll be contacted by a trustee with whom your Trump Account will be established, with further instructions on how to complete account setup.”
So who is selecting the trustee? The parents or the government?
The government. See press release from Treasury Dept.
Treasury Department Designates BNY as Financial Agent to Support New Trump Accounts Program | U.S. Department of the Treasury
We have been funding 529 plans for our eleven grandchildren since the first was born 21 years ago. The investments automatically adjust for risk as they get closer to using the funds for college.
It has all been quite painless. Contributions go automatically from our bank to the 529 plans. We have made two withdrawals for two grandchildren and the money is sent from the plan directly to the college.
With the cost of college and what we have been able to save for each of the 11, there is no worry any funds will be left after college expenses.
The contributions are ongoing for all 11 including the ones now in college. Every little bit helps.
Excellent article! Every grandparent should read this.
If I set up a UGM for a grandchild , am I responsible for the tax paperwork or are her parents? Perhaps your mentioned article covers this, so I’ll take a look.
The IRS says generally the parents are responsible:
Topic no. 553, Tax on a child’s investment and other unearned income (kiddie tax) | Internal Revenue Service
but there certainly could be special guardianship, dependency or other cases.
There are typically new rules and clarifications about secondary impacts to taxpayers when new government tax driven savings plans for taxpayers are rolled out.
One such secondary impact I am concerned about is how section 530A (Trump Accounts) could negatively affect FAFSA aid eligibility for grand children if these accounts are treated as student-owned assets (much like custodial accounts currently are) as the 530A assets would then be assessed at a high 20% rate in financial aid formula.
I would hope something authoritative will be timely issued to address this question and likely the many other planning questions that will arise.
John’s willingness, ability and actions to save for his current and future grand children financial needs is the major factor, in my opinion, that will result in those needs being met. I am trying to keep my plans and actions on a simpler path using a 529 plan with our children controlling the assets for our grand child as beneficiary as I doubt I will be around when our youngest grandchild reaches college age.
I’m also trying to fund for our grandchild but let the parents do the management and tax reporting. How do I approach that, since I haven’t yet set it up? Thanks.
My wife and I started by having a face to face meeting with our adult child and their spouse. They decided which 529 plan to use and they picked their own state’s plan which is different than the state where I live. Important to our discussion and their decision was a in person actual kitchen table review of Morningstar’s Guide to 529 Plans. My wife and I made a birth financial gift to our grand child’s parents (Our child and their spouse) and they used our gift for the initial funding of the 529.
The plan they selected is one of the Morningstar’s gold rated plans and after establishing the account they checked a box which caused the 529 plan to invite me via email to set up a link which allows me to make future direct contributions to the 529. I did set up a link and I have established my own monthly reminder and I have made a monthly contribution every month since the grand child was born.
I believe both our adult child and their spouse are caring and trustworthy people and do not feel the need to do any ongoing oversight of their future decisions regarding the 529. If I did think that oversight was necessary then I would have have created the 529 account myself.
I hope my experience helps in your decision on how to proceed Will.
Best, Bill
Bill – we agree that best to have full alignment with the parents, and we openly discussed these concepts with them. We also feel the parents are in a better position than we aging grandparents to manage the accounts for the full two decades.
I remember Jonathan mentioning that he purchased no load, low fee variable annuities for his children, I think when they were born. He may have had something there that it is worth looking into. The compounding on 65 years of stock market gains is astonishing. You need low fees and no load though.
Here is the article you referenced. It’s definitely worth reading. Thanks for the suggestion.
Nice article, John. Thanks for a peek inside your own plans for helping your grandchild
Solid. Definitely agree people should consider intervivos strategies instead of waiting until wealth becomes a legacy. You may also want to discuss with your counsel (I suspect you may already have) in terms of how the gifts will be used beyond the obvious of a 529 (if that is a prioirity for you), and, what preparations you might make for the contingencies of life and death.
Consider how you/parents might communicate the gifts as the child grows.
Myself, I started down this path 40+ years ago with modest gifts, set aside, to my children. I called them Ben Franklin accounts – in light of Ben’s long term gifts to Boston and Philadelphia.
Myself, I’d like to see employers adjust your calculus by adding Trust Account deferrals to everyone’s employee benefit package. We are still waiting on guidance from Treasury. However, once issued, this can become just one more consideration where there is a “change in status” – especially the birth of a child, and perhaps even a grandchild!
https://401kspecialistmag.com/trump-is-no-franklin-but/
You’ve given us great guidance. Thanks.
Thanks for the nice summary. Maybe you can help me with a question. I want to do a 529 to Roth conversion for my daughter’s account. The original account was opened in Iowa when she was a child. Now she is 30 yo. Five years ago we transferred the account to South Carolina when we moved there. Does this account meet the 15 year requirement? Will SC want their tax incentive back if we are able to do this?
Michael, I live in South Carolina and have two daughters who had money left over in their 529s. I did a 529-to-Roth IRA rollover for each daughter in 2024 and 2025 (a total of 4 rollovers). To the best of my knowledge, South Carolina has not asked to receive back the tax incentive.
Regarding trump accounts. From what I understand some contributions are considered pretax she others post tax.
so you have to keep track for 60+ years, or get double taxed?
The white coat investor had discussed the complexity. So I may wait till it is simplified
If you convert at age 18, then you only need to keep track for at most 18 years. That’s what I would plan to do if I end up doing this. It will be less than 18 in my case since my youngest is 8.
As much as I don’t want to keep track, it should be pretty easy as I’ll be the only one putting money in there, so I should have an idea of how much post-tax money is in there.
John, congratulations on the arrival of your first grandchild — what a milestone! Your article touches on the financial strategies to secure a new arrival’s future, which is wonderful. But I hope you’ll also discover, as I have, that grandchildren enrich your emotional life in ways no financial plan could ever measure. Wishing you and your family much joy in this new chapter.