The Boost: Investing for your children

Are you investing for your children? If they're young, leveraging compounding market returns can be a powerful way to pass on wealth. Consider this: investing $1,000 annually in the stock market could grow to over $37,000 in 18 years, assuming average annual returns of eight percent.

Saving early is popular due to the high cost of college. However, saving for your children can also offer other long-term benefits. For instance, as they mature, you can teach them about investing by “co-managing” the account. Eventually, they might choose to use the funds to start a business or buy their first home.

This week, we help you evaluate two types of accounts specifically built for investing on behalf of minors.

🧠 What you need to know

You can directly invest on behalf of your children through 529 plans and custodial UTMA/UGMA accounts, which are the most popular ways.

  • 529 Plans: Approximately 26% of families saving for college use these powerful tax-advantaged savings plans. You can contribute a large amount, and investment appreciation will always be tax-free if you use it for your children's education expenses. The specific tax benefits and investment options vary by state plan and your residence, but you can invest in any state’s plan.
  • Custodial accounts offer flexibility and aren't limited to educational expenses. You can withdraw funds if they benefit your child. In most cases, your child will gain control over the account at 18.

Choosing the best option:

Here is a high-level overview of some advantages and disadvantages of each:

529 Plan:

There are several advantages:

  • Contribution limits are high.
  • Growth for education expenses is tax-free.
  • Beneficiaries can be changed and funds can be transferred between children’s accounts.
  • You can withdraw contributions tax-free for other needs.
  • Up to $35,000 can be rolled over to a Roth IRA if held for at least 15 years.


  • Restricted to education-related expenses.
  • Based on federal rules, you can only withdraw $10K per year for K-12 private education.
  • Each state offers its own plan with limited investment options and potential tax benefits. For example, I opened a Nevada plan using Vanguard, even though I reside in California. If I lived in Nevada, I could receive extra tax benefits.
  • Limited investment options compared to custodial and traditional brokerage accounts. For example, you typically can’t invest in individual stocks.

Custodial Account:


  • Operates as a traditional brokerage account with a wider range of investment options.
  • You can use it to fund any expenses.
  • You can transfer your current assets to a custodial account.


  • Unearned income (dividends, interest, and capital gains) up to $1,250 is tax-free, but the next $1,250 is taxed at your child’s marginal rate. Anything above that is taxed at the parent’s marginal rate. Thus, it is important to monitor unearned income in a custodial account annually.
  • Could negatively impact your child’s eligibility for financial aid during college enrollment.

Choosing between a 529 Plan and a Custodial Account isn't one-size-fits-all. Consider your savings, ability to save for your children, their education needs, potential inheritance, and investment strategy. I have both types for my son and plan to regularly evaluate our family wealth to allocate between the two tax-efficiently.

🤝 How can Mezzi help?

  • See all your children’s accounts and investment holdings alongside your own in one place.
  • Performance comparison between custodial and 529 accounts.
  • Monitor unearned income in custodial accounts to minimize taxes.

We’re developing more features to manage your family’s investments. Would you like to see anything else?