If you want to give your grandchildren a head start in life, you’re not alone. Recently, a client came to us with a unique idea:

For every dollar his grandchildren contributed to an investment account, he wanted to match it dollar for dollar.

Not only would this help them grow their savings faster, but it would also teach them the power of compounding interest—a lesson that pays dividends for life.

Here’s how we helped him explore the best options.

1. Custodial Roth IRA

If your grandchild has earned income, a custodial Roth IRA is hard to beat.

• Contribution limit: $7,000/year (2024)
• Tax benefits: No upfront deduction, but growth and withdrawals are tax-free.
• Flexibility: Withdraw contributions at any time; penalty-free withdrawals for education or up to $10,000 for a first home.

This option is a favorite because it gives young investors decades of tax-free growth.

2. 529 College Savings Plan

For education-focused gifts, the 529 plan is a classic.

• Purpose: Education savings with tax-free growth and withdrawals for qualified expenses.
• Extra perk: Up to $35,000 can be rolled into a Roth IRA later in life, helping reduce the risk of overfunding.
• Ownership tip: Deciding whether grandparents or parents own the account can affect financial aid eligibility.

3. UTMA Accounts

A Uniform Transfers to Minors Act (UTMA) account functions like a brokerage account, with assets managed by an adult for a minor. The child takes control at age 18 or 21, depending on state law, and earnings may be subject to the kiddie tax.

• Flexibility: Funds can be used for anything—not just education.
• Tax treatment: Likely taxed at the child’s (usually lower) tax rate.

4. MAGA (Trump) Accounts – A New Option

A newly introduced account type, often called MAGA accounts, is still being reviewed.

• Government bonus: $1,000 seed contribution for children born within the next three years.
• Annual limit: $5,000 contribution cap.
• Taxation: Taxed on the way in and the way out—making it less tax-friendly.
• Business owner perk: Potential $2,500 deduction for contributions.

We’re watching this closely, but early indications suggest it’s more limited than initial headlines implied.

Which Option Is Best?

There’s no one-size-fits-all answer. The right account depends on your goals, your grandchild’s needs, and the tax implications for your family.

The good news? You don’t have to figure it out alone.

Thinking about creating a lasting financial gift for your grandchildren?
Visit our website to learn more about how Clarity Wealth can help you choose the right strategy to match your vision.