How Do I Start Building Wealth for My Children?

You want to set your kids up financially. Maybe it’s for college, for their first car, for a head start when they graduate—or simply to teach them about money while giving them a real foundation to build on.

The good news: there are several tools designed for exactly this purpose. The challenge: figuring out which ones fit your situation and how much to prioritize versus your own financial goals.

Let’s walk through it.

Start With Your Own Financial Foundation

Before investing for your kids, it’s worth making sure your own financial foundation is solid.

That typically means:

• An emergency fund in place
• No high-interest debt (credit cards, personal loans)
• Contributing enough to your own retirement accounts

This isn’t about being selfish…it’s about being strategic. You can’t pour from an empty cup, and your own financial security is one of the best gifts you can give your children. There are loans for college. There are no loans for retirement.

Once your foundation is solid, here are three high-leverage tools worth considering.

Tool 1: Roth IRA for Kids (If They Have Earned Income)

If your child has earned income—from babysitting, mowing lawns, working a summer job, or completing legitimate work for your business—they may be eligible to contribute to a Roth IRA.

How It Works

For 2026, a child can contribute up to $7,500 or their total earned income for the year, whichever is less.

So, if your child earns $1,000 from babysitting, they can contribute up to $1,000 to a Roth IRA. If they earn $10,000 from a summer job, they can contribute the full $7,500.

Why It’s Powerful

Roth IRAs offer:

• Tax-free growth on all investment gains
• Tax-free withdrawals in retirement (if qualified)
• No required minimum distributions (RMDs) during the child’s lifetime as the original account owner, so the money can keep growing as long as they want

Generally, the funds can’t be touched without penalty until age 59½—which means decades of compounding growth. A Roth IRA contribution made at age 16 has over 40 years to grow before retirement. One notable flexibility: a child can withdraw previously made contributions (not earnings) at any time before age 59½ without penalty. Tracking contributions and basis carefully is important to take advantage of this.

What that actually looks like

Let’s say your 10-year-old performs legitimate, documented work and contributes $7,000 to a Roth IRA. If that money is invested in equities and grows at an average of 8% annually, it could grow to approximately $320,000 by age 60 – completely tax-free.*

Decades of tax-free compounding is hard to beat.

Bonus strategy for business owners

If you own a business, you can hire your minor children to do legitimate work for the business. The wages they earn count as earned income, making them eligible for Roth IRA contributions.

The work must be real, the pay must be reasonable, and you should definitely keep records to ensure everything is done legitimately. Note that parents will also need to prepare and file Form W-2s for their children (see IRS guidance at irs.gov/businesses/small-businesses-self-employed/family-employees).

Main advantages:

If the child’s earned income is under the standard deduction ($16,100 for 2026), they pay little to no federal income tax—yet the income still counts for Roth IRA purposes.

You’re shifting money from your higher tax bracket into your child’s 0% bracket.

Depending on your business structure and the child’s age, the income may also be exempt from FICA taxes (Social Security and Medicare).

One important caveat: this strategy applies to earned income. If the child has unearned income (such as investment gains) exceeding $2,700, the kiddie tax rules may apply, taxing that income at the parent’s marginal rate.

The rules are nuanced based on business structure, state taxes, and the child’s age, so it’s worth talking to your CPA or tax advisor before implementing this strategy.

Tool 2: UTMA/UGMA Custodial Account

A UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account is a custodial brokerage account that allows you to invest on behalf of a minor.

How it works

No contribution limit. You can contribute as much as you want.

Irrevocable. Once you contribute, the money belongs to the child. If you need to withdraw funds, they must be spent solely for the child’s benefit.

Tax treatment: For 2026, the first $1,350 in earnings is tax-exempt, the next $1,350 is taxed at the child’s lower rate, and anything above that is taxed at the parent’s marginal rate.

Control transfer: At the age of majority (either 18 or 21, depending on your state), the child gains full control over the account.

Why it’s useful

A UTMA/UGMA account can serve multiple purposes:

• A place to teach your kids about responsible savings habits (they can contribute their own money too)
• A starting point for early conversations about money and investing
• A pot of money for a graduation gift, first car, wedding expenses, starting a business—whatever makes sense when the time comes

The downside: once the child reaches the age of majority, they have full control. If you’re concerned about an 18- or 21-year-old having unrestricted access to a large sum, this may not be the right tool. Also worth noting: if contributions to a UTMA/UGMA account exceed $19,000 per child per contributing individual in a given year, gift tax filing requirements may apply.

Tool 3: 529 Education Savings Plan

A 529 plan is designed primarily to cover education expenses—tuition, fees, books, room and board at eligible institutions.

Recent Changes (SECURE 2.0 Act)

Starting in 2024, the SECURE 2.0 Act allows up to $35,000 of unused 529 funds to be rolled into a Roth IRA for the beneficiary (subject to certain eligibility rules, requirements, and contribution limitations).

This makes 529 plans more flexible than they used to be. If your child doesn’t use all the funds for education, there’s now a pathway to redirect unused money into a tax-advantaged retirement account.

How to Think About It

Many families use 529 plans for education expenses rather than as a primary wealth-building tool. But it’s worth knowing the options available if funds are left in the plan after college.

Time in the market Is your biggest advantage

Regardless of which tool you use, the most important factor is time.

Even small amounts compound and grow over time. It’s better to start small than to wait and try to catch up with larger contributions later.

A $100/month contribution starting when your child is born will almost always come out ahead of a $500/month contribution starting when they’re a teenager—simply because of the extra years of growth.

What fits your family?

The right approach depends on:

• Your child’s age and whether they have earned income
• Your own financial situation and priorities
• What you’re trying to accomplish (education funding, general wealth transfer, teaching financial habits)
• Your comfort level with different account structures and tax treatments

If you’d like to learn more about OpenPlan and how our services can help your family, reach out to our team.

*Disclosure: This is a hypothetical example only, it does not represent actual investment results, and does not reflect fees, taxes, inflation, or investment losses. Funds may be withdrawn tax-free if Roth distribution requirements are met.

Disclosure: This content is for informational and educational purposes only and should not be construed as individualized advice or a recommendation for any specific product, strategy, or course of action. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. This material is not intended to, and does not, create a fiduciary relationship under ERISA or any other applicable law. For individualized advice tailored to your specific circumstances, please consult with your adviser.