As of Oct. 16, 2026
Short answer: There are four common ways to save for a child. A
custodial account (UTMA/UGMA) is a gift the child owns. An adult manages it until the age your state sets (21 in Tennessee), then it’s the child’s to spend. A
custodial Roth IRA needs the child to have pay from work, and the 2026 limit is the lesser of $7,500 or what they earned. A
Trump account (new: contributions started July 4, 2026) takes up to $5,000 a year with no job needed, plus $1,000 from Treasury for U.S.-citizen children born in 2025–2028, but the money is locked until the year the child turns 18. A
529 plan is for education. Two things catch families off guard: the
kiddie tax (a child’s investment income over $2,700 in 2026 is taxed at the parents’ rate), and
college aid (money in the child’s name counts at 20% on the FAFSA, a parent-owned 529 at most about 5.64%). Sources:
FINRA Notice 20-07 ·
Tenn. Code § 35-7-121 ·
IRS IRA contribution limits ·
IRS Trump Accounts ·
IRS Topic 553 ·
2026–27 SAI Guide.
Best move: match the account to the goal
Pick the account by what the money is for and who should control it at 18 to 21: education → a parent-owned 529; a working teen → a custodial Roth IRA; a long-term start for a young child → a Trump account; money the child may use for anything → a custodial account (UTMA/UGMA).
The math:
- Kiddie tax 2026: a dependent child’s investment income over $2,700 (2 × $1,350) is taxed at the parents’ rate (IRS Topic 553; Rev. Proc. 2025-32).
- FAFSA 2026–27: child-owned assets × 20%; parent assets × 12% then 22%–47% → at most ~5.64% (SAI Guide).
- Roth IRA 2026: up to $7,500 or the child’s pay, whichever is less (IRS).
Sources: IRS Topic 553 · Rev. Proc. 2025-32 · IRS IRA contribution limits · IRS Notice 2025-68 · FSA Handbook 2026-27 (FAFSA assets) · 2026–27 SAI Guide · Tenn. Code § 35-7-121
A best fit for the situation described, not financial advice or a buy/sell recommendation. Partner links never change a pick.
Your roadmap
- Write down the goal: college, a first car or apartment, or long-term saving. That decides the account more than anything else.
- If it’s for education, look at your state’s 529 first (it counts lightly on the FAFSA when a parent owns it). See 529 plans by state.
- If your teen has a job, a custodial Roth IRA can take up to their pay (max $7,500 in 2026). Keep pay stubs or a simple log if they’re self-employed (babysitting, mowing).
- For a child born 2025–2028, file IRS Form 4547 (or the IRS online account) to open a Trump account and claim the $1,000 Treasury contribution.
- Before a big gift to a custodial account, remember it’s irrevocable and becomes the child’s at the state age (Tennessee: 21). Gifts over $19,000 to one person in 2026 go beyond the annual gift tax exclusion.
- At tax time, if the child’s investment income tops $2,700, expect Form 8615 (kiddie tax), or Form 8814 if the parents qualify to report it.
Show me the details
The four accounts side by side
| Account | Who owns it | How much can go in | What it can be used for | Taxes | FAFSA (2026–27) |
|---|
| Custodial account (UTMA/UGMA) | The child (an adult custodian manages it) | No limit set by the account; gifts over $19,000 per giver go past the 2026 annual gift exclusion | Anything that benefits the child; at the state age (TN 21, up to 25 if the gift says so) the child controls it | Child’s income; kiddie tax can apply | Student asset: 20% |
| Custodial Roth IRA | The child | Lesser of $7,500 or the child’s pay from work (2026) | Retirement account; contributions aren’t deductible; qualified withdrawals are tax-free (IRS) | Grows tax-free if rules are met | Retirement accounts aren’t reported as FAFSA assets |
| Trump account | The child (IRA for the child) | $5,000/yr from family, child or employer (2026–2027) + $1,000 Treasury pilot for eligible births 2025–2028 | No withdrawals until Jan. 1 of the year the child turns 18; then traditional IRA rules (10% early tax can apply) | Invested only in low-cost U.S. stock index funds (fees ≤ 0.1%) | Not addressed in the sources we read |
| 529 plan (parent-owned) | The parent (child is beneficiary) | Set by each state plan | Education | Federal tax-free for qualified education costs | Parent asset: at most ~5.64% |
Sources: FINRA Notice 20-07 · OCC: What is a UGMA/UTMA account? · Tenn. Code § 35-7-121 · Rev. Proc. 2025-32 · IRS IRA contribution limits · IRS Roth IRAs · IRS Trump Accounts · IRS Notice 2025-68 · FSA Handbook 2026-27 (FAFSA assets) · 2026–27 SAI Guide. 529 details: 529 plans by state.
Custodial accounts (UTMA / UGMA)
- It’s a gift the child owns. Putting money in is an irrevocable transfer to the child. An adult custodian manages it for the child’s benefit until the custodianship ends (FINRA; OCC).
- When the child takes over: set by state law, usually 18 or 21 (OCC). In Tennessee it’s 21, or up to 25 if the gift document says so. For a lifetime gift, the document must also say that waiting past 21 makes it a gift of a future interest, which can have gift tax consequences (Tenn. Code § 35-7-121).
- No contribution cap on the account itself, but large gifts have gift tax rules: in 2026 the first $19,000 of gifts to any one person (other than future interests) isn’t counted as a taxable gift (Rev. Proc. 2025-32).
- Taxes: earnings are the child’s income, so the kiddie tax below can apply.
- College aid: because the child owns it, it’s the child’s asset on the FAFSA, not the custodian’s (FSA Handbook).
Sources: FINRA Notice 20-07 · OCC: What is a UGMA/UTMA account? · Tenn. Code § 35-7-121 · Rev. Proc. 2025-32 · FSA Handbook 2026-27 (FAFSA assets)
Custodial Roth IRA for a working teen
- Needs pay from work. For 2026, total IRA contributions can’t be more than $7,500 or, if less, the child’s taxable compensation for the year (IRS).
- Someone else can put the money in. IRS example: an unmarried student earned $3,500 and could contribute $3,500; his grandmother can make the contribution for him.
- Roth rules: contributions aren’t deductible, and qualified distributions are tax-free (IRS).
- Over the limit? Excess contributions are taxed 6% a year until they’re taken out (IRS).
Sources: IRS IRA contribution limits · IRS Roth IRAs
Trump accounts (new in 2026)
- Who: a child with a valid Social Security number who hasn’t turned 18 by the end of the year the election is made. Open it with IRS Form 4547 or through your IRS online account (IRS).
- $1,000 from Treasury: for U.S.-citizen children born Jan. 1, 2025 through Dec. 31, 2028 with a valid SSN, if the parent checks the pilot box on Form 4547 (IRS).
- Contributions: allowed from July 4, 2026. Family, the child and employers together can add up to $5,000 a year for 2026 and 2027 (inflation-adjusted after 2027). The Treasury pilot money and certain government or charity contributions don’t count toward that limit. The child doesn’t need a job (Notice 2025-68).
- Investments: only mutual funds or ETFs that track a U.S. stock index (such as the S&P 500), use no leverage and charge no more than 0.1% a year (Notice 2025-68).
- Locked until 18: no withdrawals until January 1 of the year the child turns 18 (except rollovers, excess contributions or death). After that, traditional IRA rules apply, including a possible 10% additional tax on early withdrawals (Notice 2025-68).
- Notice 2025-68 describes rules the IRS intends to put in regulations; details can change. We don’t state how Trump accounts count on the FAFSA because the sources we read don’t say.
Sources: IRS Trump Accounts · IRS Notice 2025-68
The kiddie tax (2026)
A child’s investment income (interest, dividends, capital gains) over $2,700 can be taxed at the parents’ rate using Form 8615 (IRS Topic 553). For 2026, the amounts behind that line are $1,350 and 2 × $1,350 (Rev. Proc. 2025-32).
- Who it applies to: a child under 18 at year-end; or 18 whose earned income was not more than half their support; or a full-time student 19 to 23 with the same support test. At least one parent must be alive, and the child must be required to file a return (IRS Topic 553).
- The child’s standard deduction for 2026 is the greater of $1,350 or their earned income plus $450 (Rev. Proc. 2025-32), capped at the regular $16,100.
- Report it on the parents’ return instead (Form 8814): possible if the child is under 19 (or under 24 and a full-time student), had only interest and dividends, and gross income was more than $1,350 but less than $13,500 (IRS Topic 553; Rev. Proc. 2025-32).
- A child filing Form 8615 may also owe the 3.8% net investment income tax in some cases (IRS Topic 553).
Sources: IRS Topic 553 · Rev. Proc. 2025-32
How each account counts on the FAFSA (2026–27)
- UTMA/UGMA: the minor owns it, so it’s the student’s asset, not the custodian’s (FSA Handbook).
- 529 plans: for a dependent student, a 529 designated for that student is reported as a parent investment. 529s for other children in the family are not included. If the student is only the beneficiary (not the owner), it isn’t a student asset (FSA Handbook).
- The math: a dependent student’s net worth is multiplied by 20%. Parents’ net worth, after an asset protection allowance, is multiplied by 12% and then added to income that is assessed at 22% to 47% (2026–27 SAI Guide, Table A5). So a parent dollar adds at most about 5.64 cents per dollar.
- Some applicants are exempt from reporting assets based on income and federal benefits (SAI Guide).
Sources: FSA Handbook 2026-27 (FAFSA assets) · 2026–27 SAI Guide
Limits of this page
- This page republishes IRS, Federal Student Aid, FINRA, OCC and Tennessee statute facts with dates. It does not open accounts, recommend investments or give tax, legal or financial-aid advice.
- The kiddie-tax split is a rough estimate. It assumes the child has no itemized deductions and treats all unearned income as ordinary interest. Qualified dividends and capital gains use lower rates, and Form 8615 figures the real tax using the parents' return.
- UTMA/UGMA rules (the age the child takes control, and extensions) are set by each state. We quote Tennessee's statute; check your own state's law or ask the account provider.
- Trump account rules come from IRS Notice 2025-68 (proposed guidance; final regulations may change details). How Trump accounts count on the FAFSA was not addressed in the sources we read, so we don't state it.
- The FAFSA math shows only the published asset conversion rates. Your real Student Aid Index also depends on income, family size, the parents' asset protection allowance, and whether your family is exempt from reporting assets.
- We do not list or rank banks or brokers for kids' accounts here.
Not tax, legal or financial-aid advice. We republish IRS, Federal Student Aid, FINRA, OCC and Tennessee statute facts with dates and do arithmetic on numbers you type. The account provider, the IRS, your school’s aid office and your state’s law decide what applies to you.
Sources & as-of dates
- IRS Rev. Proc. 2025-32: 2026 inflation adjustments (§3.02 kiddie tax $1,350 and $13,500 election limit; §3.14(2) dependent standard deduction; §3.42 gift exclusion $19,000; Table 3 single brackets) (tax year 2026; read 2026-10-16)
- IRS Topic no. 553: Tax on a child's investment and other unearned income (kiddie tax) (page updated Sep. 24, 2026; read 2026-10-16)
- IRS: Retirement topics — IRA contribution limits (2026: $7,500 or taxable compensation if less; grandparent can contribute for a student) (page updated Sep. 23, 2026; read 2026-10-16)
- IRS: Roth IRAs (contributions not deductible; qualified distributions tax-free) (page updated Aug. 9, 2026; read 2026-10-16)
- IRS: Trump Accounts (who qualifies, $1,000 pilot contribution, Form 4547) (read 2026-10-16)
- IRS Notice 2025-68: section 530A Trump accounts (contributions from July 4, 2026; $5,000 limit; eligible index funds ≤0.1% fees; no distributions before the year the child turns 18) (read 2026-10-16)
- HelpWithMyBank.gov (OCC): What is a UGMA or UTMA account? (last reviewed April 2021; read 2026-10-16)
- FINRA Regulatory Notice 20-07: UTMA/UGMA accounts (irrevocable transfer; custodianship ends at state age) (read 2026-10-16)
- Tenn. Code Ann. § 35-7-121: termination of custodianship (age 21; up to 25 if the instrument says so) (FindLaw, current as of Jan. 2, 2024; read 2026-10-16)
- 2026–2027 FSA Handbook, Application and Verification Guide ch. 2: UGMA/UTMA = the minor's asset; 529 for a dependent student = parent asset (2026–27 award year; read 2026-10-16)
- 2026–27 Student Aid Index (SAI) and Pell Grant Eligibility Guide (student assets × 20%; parent assets × 12% then Table A5 22%–47%) (2026–27 award year; read 2026-10-16)
What is a Trump account?
A new IRA for a child under 18 with an SSN, opened with IRS Form 4547. Contributions began July 4, 2026; up to $5,000 a year from family, the child or employers (2026–2027), plus a $1,000 Treasury contribution for U.S.-citizen children born 2025–2028. No withdrawals until the year the child turns 18 (IRS; Notice 2025-68).
Estimates, not financial advice. Taxes, insurance, PMI and fees vary by lender, county and city; confirm with your lender, dealer and state agency before acting.