It sounds like a simple question, but the answer can get complicated quickly. We recently worked with a couple who have two little ones under age three. They both wanted to set money aside for their daughters. The difference? One wanted the money locked in for education, while the other wanted it available for any future need. That tension is common. Most parents want to save for their kids but arenât sure where to put the money. Should it go in a savings account? A custodial account? A 529 plan? Each option has pros and cons. Below, weâll break down three of the most common savings vehiles, and the new account coming our way in 2026:
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What it is:
Open a joint savings account with your child at your local bank or credit union. Easy to set up, low risk.
Taxes:
Kids pay tax on interest or investment income (the âkiddie taxâ). For 2025, the first $1,350 is tax-free, the next $1,350 is taxed at the childâs rate, and above that gets taxed at the parentsâ rate. In reality, with todayâs low savings rates, most kids wonât earn enough interest for this to matter.
College Aid Impact:
Money in your childâs name counts heavily against them when applying for need-based financial aid (about 20%). In a parentâs name, it counts much less (about 5.64%).
Control:
Parents are joint owners while the child is a minor. Once they turn 18 (or 21 in some states), the account becomes theirs.
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What it is:
A custodial account lets you save and invest on behalf of your child in things like stocks, bonds, or mutual funds. We establish these types of accounts for our clients all the time. Itâs essentially a brokerage account for the benefit of your child.
Taxes:
Same kiddie tax rules as above. Since you can invest beyond just cash, income and gains may be larger.
College Aid Impact:
Like bank accounts, these are considered the childâs assets, so they can reduce financial aid eligibility more than parent-owned accounts.
Control:
Parents manage the money until the child reaches the âage of majorityâ (18â21, depending on the state). At that point, the child gets full control.
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What it is:
An account built specifically for education savings. Money grows tax-free, and withdrawals are tax-free if used for qualified education costs (college, K-12 tuition up to $10,000/yr [$20,000/yr starting in 2026], and certain apprenticeship programs).
Taxes:
Contributions arenât deductible federally, but many states (listed here) offer a tax deduction or credit.
New update: Thanks to SECURE Act 2.0, unused 529 funds can now be rolled over to a Roth IRA for the beneficiary (up to $35,000 lifetime, with annual contribution limits). This helps if your child doesnât use all the funds for school.
College Aid Impact:
529s owned by the parent count as a parent asset, reducing aid eligibility by up to 5.64% of the balance. Thatâs far less impact than custodial accounts.
Control:
The account owner (usually the parent) stays in control. You can even change the beneficiary to another child.
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What it is:
A new federal initiative established under the "One Big Beautiful Bill" signed into law on July 4, 2025. Trump Accounts are tax-deferred savings accounts created for children under 18. Newborns born between January 1, 2025, and December 31, 2028, will receive a one-time $1,000 government contribution into their Trump savings account. Parents, guardians, family members, and employers can contribute up to $5,000 per year, with employers able to contribute up to $2,500 of that total.
Taxes:
Earnings grow tax-deferred. Subject to annual contribution limits of $5,000 from friends/family and $2,500 by employers.
College Aid Impact:
TBD, but likely counted as a child-owned asset.
Control:
The account owner (usually the parent) stays in control until the child turns 18.
What is the best way to save for your childâs future?
Thereâs no one-size-fits-all. Some families use just one, others a combination. To decide, ask yourselves:
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At the end of the day, the âbestâ account is the one that matches your goals for your kids. If youâre feeling stuck, reach out. We love helping parents sort through these options so they can move forward with confidence.
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Fyooz Financial Planning is a fee-only, fiduciary financial planner based in Minneapolis, MN and Portland, OR, dedicated to helping couples achieve their financial goals. Whether you're planning for retirement, managing investments, or looking for tax-efficient strategies, our experienced team provides personalized guidance.
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Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFPÂź, or Daniel Slagle CFPÂź. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
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