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Why This Matters
Every parent wants to give their kids a financial head start. But if you’re not careful, gifting money can backfire — either with taxes, restrictions, or kids blowing it at 18 on something dumb.
There are a few key ways parents and grandparents can pass money down: custodial accounts, Roth IRAs, 529 college plans — plus one “bonus” option if you don’t quite trust your kid to handle it yet.
The Main Ways to Gift Money to Kids
1. UGMA / UTMA Custodial Accounts
Parent or grandparent opens the account in the child’s name.
Pros: Child owns the assets, taxed at child’s rate, can invest broadly, high gifting limits.
Cons: Becomes the child’s money at 18 or 21, counts against financial aid, irrevocable.
👉 Good starter option — but you need to trust your kid won’t blow it as soon as they gain control.
2. Custodial Roth IRA
Child must have earned income (babysitting, mowing lawns, part-time job).
Pros: Tax-free growth, withdrawals for first home/education allowed, doesn’t hurt FAFSA.
Cons: Requires earned income, rules on withdrawals can confuse.
👉 One of the most powerful wealth gifts if your child works — time + compounding is magic here.
3. 529 College Savings Plan
Parent/grandparent controls account; child is beneficiary.
Pros: Tax-free growth for education, high contribution limits, can transfer to another beneficiary.
Cons: Must be used for education, limited investments, penalties for misuse.
👉 Best if you’re confident your child will use it for education. If not, look at a custodial account.
Bonus: If You Don’t Trust Your Kid
Steve’s take:
“If you don’t trust your kid, you can always set up a trust with restrictions — like money at 21, more at 25. Personally, I think that’s more trouble than it’s worth. I trusted my kids, and yeah, you could get burned, but the chance is small. You’ve got to look at your own kids and decide if you’re comfortable handing over the reins.”
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Key Takeaways
UGMA/UTMA: Flexible, but loss of control when they hit 18 or 21.
Roth IRA: Incredible long-term gift — but requires earned income.
529: Great for college, restrictive otherwise.
Trust option: Only if you really can’t hand over control.
This was our deep dive into gifting money to children.
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