January 9, 2026: Investing for Your Children’s Future

If you would like to save and invest for your children, there are several ways to do so. The method you choose ultimately depends on your (and your children’s) goals. Some of these methods are more flexible than others so play close attention to the rules for each type of account.

529 Plans

529 plans are designed to be used for education expenses (usually college), so if you would like to contribute to your children’s education this is generally an effective way to do it. In Iowa you can deduct your 529 plan contributions up to $5,800 per beneficiary from your Iowa income tax return. Not all states have this feature.

529 plans are useful for education expenses since withdrawals are tax-free when funds are used for qualifying education expenses. Interest, dividends, and appreciation inside the account are not taxable. However, if funds are not used for qualifying education expenses then taxes and penalties on the earnings will apply.

Recent legislation changes have made 529 plans a bit more flexible to avoid being overfunded. 529 plans can be used to pay for K-12 tuition, pay down student loan debt, and can be rolled over to Roth IRAs.

Coverdell Education Savings Account (ESA)

The Coverdell ESA is a less-common way to save for future education expenses. The contribution limit is very low ($2,000) compared to 529 plans and the contribution is subject to certain income limits. Another major difference compared to 529 plans is that Coverdell ESA funds must be used by the time the beneficiary reaches age 30. 529 plans have no such requirement.

UTMA/UGMA (Custodial Accounts)

UTMA and UGMA are the abbreviations for the congressional acts that allow for the gifting of assets to minors. They are often referred to as custodial accounts. Each UTMA/UGMA account must be managed by a single custodian (often a parent) and the funds can be invested for the child’s future. Unlike 529 plans or Coverdell ESAs, custodial accounts do not need to be used exclusively for education expenses, which makes them much more flexible.

One notable “drawback” of this account is that the assets must be fully transferred to the beneficiary’s control when they reach the age of majority. In Iowa, this means that the account must be transferred to the beneficiary at age 21. Some parents may be concerned about the child’s ability to manage the account responsibly at age 21, especially if there is a substantial balance.

Custodial Roth IRA

You may have a Roth IRA for yourself and understand its features - contributions are made with after-tax dollars and withdrawals are tax-free (provided all necessary conditions are met). The same is true of a custodial Roth IRA. A custodial Roth IRA is subject to the same age of majority transfer described in the UTMA/UGMA section.

One often overlooked aspect of custodial Roth IRAs is that the child must have earned income. This is the same requirement as your own Roth IRA. So if your child doesn’t have earned income (like from a summer job), gifting them funds for a custodial Roth IRA is prohibited.

Not every characteristic of these accounts has been detailed above so there may be other features or drawbacks you are not aware of. Carefully consider what the goals are for the funds and understand what types of benefits and restrictions there are for the type of account you choose.