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, 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.