Tax-efficient ways to invest for your children’s long-term success
Investing for your children can serve two purposes: growing their future wealth and lowering your current taxable income. By using accounts that take advantage of your kids’ lower tax rates or offer tax-free growth, you can save money now without losing control of your financial goals.
Here’s a beginner-friendly guide to get you started, with tips to avoid common mistakes. But for the nitty-gritty details and tailored strategizing, it’s always a good idea to chat with a financial advisor, especially for big-picture planning like this.
Why shifting income to your kids saves taxes
Kids usually fall into lower tax brackets than their parents, so moving income-producing investments into their name can cut your family’s overall taxes.
- Lower tax rates for kids. Income from investments, like dividends or interest, gets taxed at your child’s rate, which is often much lower than yours.
- Gift tax basics. Giving assets to your kids counts as a gift. In 2025, you can give up to $19,000 per child without needing to report it to the Internal Revenue Service (IRS). Go over that, and it dips into your lifetime gift tax exemption — $13.99 million for 2025. This exemption is the total amount you can give away over your lifetime without paying federal gift tax, above and beyond the annual gift limits. Keep it under the limit to avoid extra tax complications.
- Watch out for the kiddie tax. This rule limits how much tax-free or low-tax income your kids can have. For 2025, the first $1,350 of their unearned income — like investment earnings — is tax-free, the next $1,350 is taxed at their rate and anything above that gets taxed at your top rate. Plan carefully to stay in the sweet spot.
3 smart ways to invest for your kids (and save on taxes)
The right account can help you grow your kids’ wealth while keeping more money in your pocket today. Here are three great options, each with its own tax perks:
1. Custodial accounts
Think of a custodial account like a savings or investment account you manage for your child until they’re an adult — between 18 and 25, depending on your state. The money is legally theirs, but you call the shots for now.
- Tax perk. Earnings like interest or dividends are taxed at your child’s lower rate, up to the kiddie tax limit, reducing your taxable income.
- Flexibility. No limits on how much you can put in or how the money’s used once your child takes over.
- Best for: Parents who want a simple way to invest for their kids while cutting taxes now.
2. 529 college savings plans
A 529 plan is a go-to for saving for your kids’ education, with some nice tax benefits thrown in.
- Tax perk. Your contributions don’t lower your federal taxes, but many states offer deductions or credits for what you put in. Plus, the money grows tax-free, and withdrawals for things like tuition or books are tax-free too.
- Flexibility. You can change the beneficiary to another family member if plans shift.
- Best for: Families saving for college or other education costs who want tax-free growth and possible state tax benefits.
3. Custodial IRAs
Got a kid with a summer job or other earned income? A custodial IRA lets you save for their retirement in a tax-smart way.
- Tax perk. Contributions to a traditional IRA might be deductible, and Roth IRAs grow tax-free. Either way, you’re shifting savings into a tax-advantaged account in your kid’s name, which can lower your family’s future tax burden.
- Limits. Contribute up to $7,000 in 2025 or your child’s earned income, whichever is less. Withdrawals before age 59 and a half may come with taxes or penalties, so this is for long-term planning.
- Best for: Kids with part-time jobs or earned income who can start building retirement savings early.
Quick comparison of your options
| Account type | How it cuts taxes | Key tax benefits | Who controls it | Best for |
| Custodial account | Shifts investment income to child’s lower tax bracket | Earnings taxed at child’s rate (up to limits) | Parent until child is an adult | Flexible investing with tax savings now |
| 529 plan | Possible state tax deductions; no federal deduction | Tax-free growth and withdrawals for education | Usually parent | Education savings with tax-free growth |
| Custodial IRA | No immediate deduction; tax-advantaged growth | Tax-deferred or tax-free growth (Roth) | Parent until child is an adult | Retirement savings for kids with income |
Things to keep in mind
- Kiddie tax limits. Stay under the $2,700 threshold — $1,350 tax-free plus $1,350 at your child’s rate — to maximize savings.
- Gift tax rules. Stick to the $19,000 annual gift limit per child to avoid extra IRA forms.
- Match the account to your goals. Custodial accounts are flexible but give your kid control as an adult. 529s are great for education but are less flexible. IRAs are best for long-term retirement savings.
- Talk to a pro. Tax rules can change, and everyone’s situation is different. A tax or financial advisor can help you nail the details.
Mistakes to avoid
- Ignoring the kiddie tax. Putting too much in a custodial account can push income into your higher tax bracket, eating up your savings.
- Forgetting gift tax limits. Going over $19,000 without planning can lead to surprise tax filings.
- Choosing the wrong account. Don’t use a 529 for non-education needs or a custodial account if you want control after your kid turns 18.
- Skipping earned income checks. Custodial IRAs only work if your child has earned income, so double-check before contributing.
- Going at it alone. Tax laws are tricky. A professional can save you from costly mistakes.
How to get started
Saving for your kids’ future while cutting your taxes today is a win-win, but it takes planning. Pick an account that fits your family’s goals — whether it’s flexibility, education savings or early retirement planning. Keep an eye on tax rules or limits, and don’t hesitate to bring in a financial advisor or tax advisor to create a plan that works for you.
