Tax-Deferred Savings Options for Children
By: Tax Hotline
Fall 2026 (Vol. 44, No. 3)
Q: What are the best tax deferred options for saving for my children’s future?
A: 529 plans and custodial Roth IRAs are generally the strongest options, with newer Trump Accounts (also known as Section 530A) as a notable tax-deferred alternative. Pure tax-deferred accounts (growth taxed later as ordinary income) are less common and often less advantageous for kids than tax-free growth options due to the long time horizon and children’s typically low current tax rates. Here is an overview of these top three plus other popular options:
529 PLANS are the gold standard for education savings. Growth is tax-deferred, qualified withdrawals (tuition, fees, books, room/board, computers, certain K-12, apprenticeships, and limited student loans) are tax-free federally, and many states add tax breaks on contributions. There are high aggregate contribution limits that vary by plan, and contributions generally fall under the $19,000 individual or $38,000 married-couple annual gift-tax exclusion for 2026. Anyone can contribute, the parent usually retains control, and up to $35,000 can be rolled over to the beneficiary’s Roth IRA over a lifetime if certain conditions are met which helps eliminate the use it or lose it risk.
CUSTODIAL ROTH IRAS offer the most powerful long-term compounding for kids who work (babysitting, lawn care, part-time jobs, etc.). Because kids usually face 0–10% tax rates (or none, given the standard deduction), paying taxes now and getting decades of tax-free growth is usually superior to deferral. Contributions can be withdrawn anytime tax- and penalty-free; earnings have restrictions until age 59½ (with exceptions for education, first home, etc.). Since Custodial Roth IRAs are funded with after-tax dollars, they work best for long-term wealth building or retirement while allowing flexible early access to contributions. The annual contribution limit is the lesser of the child’s earned income or $7,500 in 2026. The child must have documented earned income (such as a W-2, 1099, or legitimate work), and a parent or guardian manages the account until the child reaches the age of majority.
TRUMP ACCOUNTS are the clearest pure tax-deferred vehicle designed for minors. They function like traditional IRAs for minors and provide tax-deferred growth, with withdrawals later taxed as ordinary income. They are designed for general long-term savings, especially when the child has no earned income. The annual contribution limit is $5,000 (from family, employers, or others), with inflation adjustments beginning after 2027; eligible children born in 2025–2028 can also receive a $1,000 federal seed contribution. No earned income is required to open or fund the account, investments are limited to low-cost U.S. equity index funds, withdrawals are generally not allowed until the year the child turns 18, and the account then converts to a traditional IRA structure.
COVERDELL EDUCATION SAVINGS ACCOUNTS (ESAS) provide tax-deferred growth and tax-free withdrawals for education expenses, including a broader range of K-12 costs than 529 plans. They are best for education savings. The total annual contribution limit is $2,000 across all accounts for the beneficiary. Income phase-outs apply (roughly $95,000–$110,000 for single filers and $190,000–$220,000 for married couples filing jointly), and the funds generally must be used by age 30.
TRADITIONAL CUSTODIAL IRAS offer tax-deferred growth and a possible upfront tax deduction, with withdrawals later taxed as ordinary income. They are rarely preferred for kids. The contribution limit is the same as for a Roth IRA—the lesser of earned income or $7,500. Earned income is required, and any tax deduction usually has limited value because children typically have low current tax rates.
SERIES EE/I SAVINGS BONDS defer interest tax until redemption and can make interest tax-free for higher education under strict rules (bonds must be owned by a parent age 24+ at purchase, income phase-outs apply, etc.). They are lower-risk but generally lower-return than equity-focused accounts.
UGMA/UTMA CUSTODIAL ACCOUNTS are flexible for any purpose but are not tax-deferred, earnings are taxable annually (with limited “kiddie tax” exemptions).
Contribution and gift-tax rules, investment menus, and state benefits change, so confirm current details with the plan provider, IRS, or a tax advisor. Financial aid impact also varies (529s and parent-owned accounts are generally more favorable than student-owned assets).
PRACTICAL RECOMMENDATION Prioritize a low-cost 529 (check your state’s plan for tax benefits first; otherwise highly rated options like Utah’s my529, New York, or others with low fees) if education is likely. Add a custodial Roth IRA once the child has earned income. Use a Trump Account if you want tax-deferred growth without an earned-income requirement or to capture the seed money for eligible newborns. Many families use a combination. Consult a tax professional or financial advisor for your specific situation, as rules (especially around Trump Accounts) continue to evolve.
Q: I opened a 529 plan for my son in 2012 and it still has unused funds in it. Can I change the beneficiary to my new grandchild or use it for something different for my son?
A: Yes, you can change the beneficiary from your son to your grandchild. A grandchild qualifies as a family member under IRS rules, so the switch is generally not treated as a taxable distribution. Here are the options to consider: To change the beneficiary to the grandchild, contact your 529 plan for the form. This keeps the money tax-advantaged for education. Because it skips a generation, amounts over the $19,000 annual gift exclusion (2026) may require a gift-tax filing (Form 709), though actual tax is rare.
Keep in mind, there is no deadline, the account can stay open indefinitely. You could leave the funds in case your son returns to school or you could also do a Roth IRA rollover (for your son): Up to $35,000 lifetime can move to his Roth if the account has been open 15+ years, contributions are at least 5 years old, he has earned income, and you stay within the annual Roth limit ($7,500 in 2026). Changing the beneficiary may restart the 15-year clock (IRS guidance is still incomplete). Other tax-free uses to consider include funding for Graduate or trade school, certain apprenticeships, up to $20,000/year for K-12, or up to $10,000 toward student loans.
Q: Can I take $14,000 out of my HSA this year to reimburse qualified expenses I paid out of pocket over the past three years?
A: Yes. There is no limit to how many years back you can reimburse yourself from an HSA. You can reimburse qualified medical expenses from any prior year as long as the expenses were incurred after your HSA was established, they were qualified medical expenses that weren’t already reimbursed by insurance or another account, and you kept records and receipts to prove it.