Giving to Your Children
“We cannot always build the future for our youth, but we can build our youth for the future” - Franklin D. Roosevelt
In my book, Principles of Prosperity, I talk about the importance of values and goals, their role in personal finance, and how they should be explored and ultimately pursued. Perhaps one of the most significant value-changing life events is the birth of a child. Finances, behaviors, routines, career paths, career choices, and every other priority can suddenly change. Parents are faced with the challenge of a new life, complete with the worries of their children’s future along with their own. Thinking about the child’s future usually revolves around education and health, but another common goal is providing for the child’s financial future.
The value of giving.
Providing a financial foundation for your children is a generous goal. In step 6 of my 7 Habits of Financial Success, I talk about the value of giving to others. Of course, while giving to worthwhile charities can be a virtuous act, giving to your own children can be profoundly rewarding and provide a legacy well beyond your years.
If you’re a parent who wishes to give to your child(ren), there are many ways to do so. Here we’ll discuss the many strategies of giving to your child, the benefits of each, and the potential setbacks involved. But first, a warning.
Secure your mask first.
If someone asks about my thoughts on giving to children, I begin by asking a few questions myself:
Do you mind sharing some facts about your financial situation?
Do you have a secure retirement plan?
Do you have an emergency fund?
Do you have plans for long term care?
If the answer to any of these questions is no, then I try to stick to generalities. However, the questions themselves have a point. That is, secure your financial mask first.
The truth is, 40.2% of retirees rely entirely on Social Security for their income(1). No additional pension or investment accounts. Also, 70% of retirees in the U.S. have no form of long-term care insurance(2). Even more grim, 42% of Americans don’t have an emergency fund(3).
Of course, if you’re thinking about giving money to your child, chances are you are in good financial shape. However, the questions above should always be explored. If you are sacrificing your financial health or future by giving money to your children, you are increasing the risk of being a financial burden in future years. After all, who do you expect to help you when you need long term care, or can no longer afford to live in your home? Giving money now only to create a large financial debit in future years can be ruinous for both you and your children. Make sure you’re in good shape first.
529 accounts
When considering giving to your child, a good place to start is a 529 account. 529 accounts are designed to benefit the child by paying for their educational needs. These accounts are managed by individual states, so details can vary. However, the main benefits of the accounts are universal and can be used for education in any state, regardless of state of origin. Here are the details.
Contributions
All contributions are after tax.
Anyone can contribute to a 529 account. Parents, grandparents, friends, etc.
Contribution limits are very generous (can allow for five year’s worth of gift-tax-free contributions at once).
Growth
Invested funds growth tax free
Distributions
Distributions used for qualifying expenses are received tax free.
Qualifying expenses are very generous. Tuition, fees, room & board, books, supplies, computers, software, internet access, special needs, K-12 education (up to $10,000 a year), vocational and apprenticeship programs, and even student loan repayment (up to $10,000 per beneficiary).
If unused, can be rolled into a Roth IRA for the beneficiary (up to $35,000 total).
While a 529 isn’t giving money directly to your child, it is set aside for their benefit. It can provide them with an education or training, prevent the need for student loans, and lower the cost of education for you as a parent if you were planning on providing it anyway.
There are few drawbacks, but they should be considered. Since 529’s are specifically designed to help pay for education, they are not useful if used for other needs. That is, if you or the child withdraws funds for non-qualifying expenses, the tax benefit of the 529 is eliminated. You may owe income tax on all growth along with a potential 10% penalty.
Trump accounts
Introduced in 2025 as part of the Big Beautiful Bill, Trump accounts are a new form of savings vehicle for children. These accounts are another way to set money aside for children without giving them direct access to the money. They’re similar to 529s, but instead attempt to provide for a broader array of future uses.
Contributions
The U.S. Government will provide a $1,000 tax-free seed contribution to Trump accounts for all children born between Jan. 1, 2025 and Dec 31, 2028.
Parents can contribute $5,000 annually to the account. Parent contributions are after-tax.
Parent contributions create cost basis in the accounts
Growth
All growth is tax-free and must be invested in low cost index funds tracking US equities.
Withdrawals
Qualified withdrawals are taxed at long-term capital gains rates. Note: as of the date of this article, it is still unclear if all qualified withdrawals will receive this treatment. For now, we will assume all qualified withdrawals will be taxed this way.
Qualified withdrawals can be for education, first time home purchase, starting a business, medical expenses, death, or disability.
Non-qualified withdrawals are taxed as income plus a potential 10% penalty.
Withdrawals in retirement are taxed at ordinary income tax rates.
Basis is not subject to tax.
Since these accounts are new, the details are still being ironed out. However, it is clear that these accounts are intended to be somewhat of a “catch-all” of setting children up for financial success. Since the funds can be used for education, starting a business, first time home purchase, etc, it is intended to be a financial foundation-setter for young adults. However, as explained in the article linked above, if you have specific goals in mind for your children, a trump account may not be the sharpest tool to use.
Roth IRAs
Yes, Roth IRAs can be set up for children. Just like normal Roth IRAs, contributions are made after tax, grow tax-deferred, and are received tax-free in retirement (or other qualified withdrawal).
It is important to note that the child must have earned income to contribute to a Roth IRA. The good news is the child does not need to file a tax return or receive a W-2 to justify the earned income. The income can be from a job, mowing lawns, lemonade stands, etc. Just keep track of the income carefully should the IRS decide to scrutinize any contributions.
Contributions
Contributions are after-tax.
$7,000 annual contribution limits for those younger than 50. Income limits apply (not common for children).
Must have earned income.
Growth
All growth is tax-free.
Withdrawals
Contributions (basis) are always eligible for withdrawal without penalty or tax.
Qualified withdrawals are tax free
Age 59.5, disability, willed to heirs, or first time home purchase (up to $10,000).
As the parent wishing to give to a child, a Roth IRA can provide a powerful way to do so. Instead of a present gift that can be squandered, setting up a Roth IRA allows for a gift of time along with money (and compounding interest). Also, many parents allow their child to keep the money they earned and “match” dollar for dollar into a Roth IRA in their name. This is powerful way to give to your child as these funds are intended to grow over decades and help provide for a comfortable retirement.
Note: Be aware that annual gift tax exclusion applies, but is well above the $7,000 limit for Roth IRAs.
Keep it, give it.
Earlier, I talked about parents who ask me the best way to give to children. After asking the “secure your own mask” questions, I then ask what their goal is. They usually say education, home purchase, retirement, etc. Not surprisingly, not a single parent answers, “I want them to have party money in college,” or “I want them to buy a new sports car after they graduate high school.” The reasons I hear are varied, but they are always virtuous.
Unless parents firmly state they want to save for their child’s education (529’s are great), I ask, “what’s the hurry to give away your fortune”? Why not hold on to the money, set it aside in another account, and make the money available for your children when a worthwhile reason arises? Yes, this tactic isn’t as tax efficient as the accounts listed above, but it maintains ultimate control and flexibility. Oh and, by the way, taxable brokerage accounts aren’t as tax inefficient as you may think.
On the other hand, with each beneficial aspect of the accounts listed above, there are drawbacks. The drawbacks vary, but all involve restrictions on when or why the child can use the funds. These restrictions are the trade-off for the benefits, ensuring the funds are used for the right reasons.
If you wish to give your children a solid financial footing as young adults and have no specific goals in mind, keeping your money and giving it when the time is right provides the greatest flexibility and oversight among giving strategies. You can give money for a car payment, home down payment, business seed money, honeymoon, furnish a home, education, medical bills, etc. You can choose any reason (and any time) to give to your children.
Note: Along with the relative tax inefficiency of this tactic, there are limits to the amount you can give. However, the limits are extremely generous. As always, reach out with any questions.
Sources
1 Biggs, A. (2020, January 27). Factcheck: Do 40% of retirees rely on Social Security for their entire income? Forbes. https://www.forbes.com
2 Schmidt, E. (2024, February 6). Long-term care statistics 2025. ConsumerAffairs. https://www.consumeraffairs.com
3 Giovanetti, Erika. “Survey: 42% of Americans Don't Have an Emergency Fund.” U.S. News & World Report, 22 Jan. 2025, www.usnews.com.
4 West Health. (2025, April 2). Inability to pay for healthcare reaches record high in U.S. West Health. https://www.westhealth.org
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