Investing for your child’s education can be done in a variety of ways

Several traditional investment vehicles exist for financing a child’s education, including savings accounts, custodial accounts, Roth IRAs and 529 plans.
Each savings method offers different tax characteristics, contribution limits and levels of flexibility for how the money can be used.
While the proposed Trump Accounts offer an initial $1,000 government contribution for eligible children, they have less flexibility than other options.
Last week you outlined the main characteristics of the new Trump accounts that start in 2026. How do these accounts compare to other methods of saving for children with the primary goal of financing education?
— ADHOC
This week we examine four traditional vehicles used in investing for children and compare them to the new Trump Accounts. Our analysis concentrates on tax characteristics, flexibility and availability.
You can open savings accounts or CDs for your children. These are usually in a joint account with parent and child, and the parent is the main account holder. As the ultimate safe investments, there are no limits on how much is invested and these accounts are insured by the financial institutions up to $250K. These are low risk and low return investments. The tax burden is on the parents. In terms of flexibility and availability, this option has no challengers.
Custodial accounts opened under the Uniform Gifts to Minors rules allows adults to invest money on the child’s behalf. Contributions to these accounts are considered an irrevocable gift to the child. The adult creating the account may be involved in managing the account until the child turns age 18 to 25 (depending on the state), but payments are expected to be made only for items benefiting the child, and at the age of transition, are totally controlled by the child.
As a child, the first $1,350 of earnings are tax-free, the next $1,350 at the child’s rate, and above that, likely at the parent’s higher rate. Note while the savings account or CD options above are open-ended about the amounts that can be contributed, custodial accounts are considered gifts to the child and they may be subject to gift tax to the extent they exceed 2026’s maximum of $19,000 per donor (so potentially $38,000 from a married couple/parents).
These accounts don’t have to be used just for education expenses, and once created, can’t be transferred to another child. So, if you are not sure that your child is likely to go to college, or if you want to create a gift as they reach adulthood, this may be a good option.
Roth IRAs are often mentioned in education planning. For a parent, a Roth IRA allows them to invest after-tax money each year (as long as they are below the 2026 AGI threshold of $153,000 (single) or $242,000 (married)) or up to $7,500 (under age 50) or $8,600 (50 or older). This is the most popular plan outside of workplace retirement opportunities.
Withdrawals of contributions are always tax free, and earnings withdrawals are tax-free after a five-year waiting period. So, this flexibility feature, because the principal amount can be taken without tax or penalty, makes it an interesting candidate for education expenses, as long you make sure you have another source of retirement savings for yourself, like a 401(k) or 403(b) plan, if you are using a significant portion of the Roth moneys for your children’s education.
And once your child begins earning money, whether wages or lawn mowing or pet care, he/she can contribute their earnings into a Roth as well, and it would likely shield them for any income taxes. While Roth IRAs are retirement plans, the child can use the contributions withdrawn for qualified expenses, like education.
Section 529 Plans have become a very popular option in recent years. These are state-sponsored plans and typically offer a state deduction or credit to the account holder.
Although there is no federal deduction or credit, neither is there a federal tax if money is withdrawn for an appropriate education expense. We mentioned as an example last week, the Indiana 529 Education Savings Plan Credit offers an immediate tax credit of up to $1,500 if the person opening the account takes the opportunity to put away $7,500 into a plan (20% credit). This recently enhanced limit, plus the tax-free earnings make this a priority investment option for those looking to fund savings plans for their children or grandchildren.
Another important feature is its flexibility. As mentioned above, custodial accounts can’t be transferred among children. Section 529 balances may be transferred from one child’s account to another qualifying family member, and it can also be used after a period of time to pay down student loans or even possibly be transferred to a Roth IRA in the child’s (now an adult) name if the 529 has been held for a designated beneficiary for at least 15 years.
The Trump Accounts start you with a nice advantage over the next four years, if your child is born between 2025 and 2028, giving you the initial $1,000 contribution. However, beyond that early payment, there are distinct disadvantages compared to the other options above.
There is a lack of flexibility, with the money not available until the child is 18. The investment, whether the initial $1,000 or other contributions made by the parents, are all managed by the government during the account’s growth period. If a withdrawal is made after 18 for a purpose that is not designated (e.g., education or home purchase among others), the withdrawal will be subject to penalties as well as ordinary income tax rates.
So, although it is still attractive to take advantage of obtaining the $1,000 if you are eligible for the Trump plan, for parents considering contributing additional education monies, they will likely be better served to use the 529 plans to reach their goals.
One final comment: No matter which route a taxpayer chooses, the real winner is the child who finds his/her route to further education facilitated by money set aside by his/her loving and financial-savvy parents.
Ken & Klee’s Tax Notebook
For more than two decades, the IRS has used the Annual Dirty Dozen list to flag emerging scams that taxpayers should watch out for. They released the 2026 list this past week. It highlights items such as: IRS impersonation by email and text; AI-enabled IRS impersonation by phone (robocalls, voice mimicry, spoofed caller ID); and fake charities, where fraudsters often exploit tragedies and disasters by creating fake charities to collect donations and personal information. The IRS reminds you that it generally contacts taxpayers by mail first and does not leave urgent, threatening prerecorded messages.
Tax Talk is a community outreach service of the Vivian Harrington Gary University of Notre Dame-Saint Mary’s College Tax Assistance Program (TAP) which enters its 55th year of free income tax preparation in 2026.
Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at rklee@nd.edu.
Ken Milani is a professor emeritus of accountancy at Notre Dame where he served as the faculty coordinator of the TAP from 1972 until 2011. Contact him at milani.1@nd.edu.
Email either with questions.