3 Essential Accounts to Set Up for Your Children

Here are the only three accounts that I would consider opening for your children. One will give them a phenomenal head start in financial flexibility. One can make them a millionaire by retirement. And one can save you from being broke long before retirement. I'm Tyler, a former financial advisor and portfolio manager, and I create financial content for free to guide you in your financial decisions.

1. UGMA (Uniform Gifts to Minors Act)

The UGMA is an account that lets you transfer assets to your children without needing a formal trust, and it's available through any major brokerage. The first $1,250 of unearned income is tax-free. The next $1,250 is taxed at the child's rate, and anything beyond that is taxed at the parent's rate. There are no annual contribution limits, but the child gains full control of the assets between 18 and 21, depending on your state. So if little Timmy isn't financially savvy or trustworthy, you might want to think twice about this one. Additionally, since UGMA assets are considered the child's assets, they will affect your financial aid eligibility more than if they were parental assets.

2. Custodial Roth IRA

The Custodial Roth IRA is funded with post-tax dollars and is excellent for teaching your children about long-term investing. Contributions are limited to the lesser of your child's earnings or the annual limit. Yes, your child can earn money through jobs like babysitting or helping with family business tasks. However, you cannot just put assets into the account unless it's from legitimate earned income. The primary advantage of this account is that even a one-time contribution of $7,000 at a young age could easily set your child up to be a millionaire by retirement if invested appropriately. However, keep in mind this account is also considered a child's asset for financial aid eligibility.

3. 529 College Savings Plan

If little Timmy or Sally is college-bound, the 529 College Savings Plan is your new best friend. This account is funded with post-tax dollars like a Roth IRA. However, unlike a Roth, you can contribute over $500,000 to most of these accounts, depending on your state’s plan. The 529 offers tax-free growth and withdrawals on qualified educational expenses. Additionally, you retain full control of this account and can change the beneficiary if needed. It’s the only one of these three accounts treated as a parental asset and not a child's asset when considered for financial aid. Even better, now up to $35,000 of unused funds can be rolled over to a child's Roth IRA, offering them similar benefits.

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