The Grandparent’s Guide to Investing for Grandchildren

By the time you become a grandparent, you’ve already invested in future generations in countless ways. You’ve raised your own children to adulthood, instilled values, shared traditions and put time and money into building your family.

Investing financially for your grandkids’ future can be a way to continue your legacy and give your family the resources to help reach their full potential.

How to Invest on Behalf of Your Grandchildren

Giving cash is one way to provide financial support behind your grandkids’ plans. But there are advantages to investing in your grandchildren through, well, actual investments. Over time, investing can result in higher long-term growth than savings thanks to market gains. Grandchildren (or your adult children) may feel less tempted to frivolously spend an investment compared to cash in the bank. And some forms of investments come with tax advantages.

You can save for a student’s higher education through a few types of tax-advantaged accounts:

529 Savings Plans

Earnings in a 529 savings plan grow tax-free, and qualified education-related withdrawals aren’t taxed, so the money you contribute can go a long way.

The recent “grandparent loophole” for 529 plans changed how this gift impacts financial aid. Previously, money taken from a grandparent’s 529 plan was treated as untaxed student income and could substantially reduce their eligibility for need-based aid. As of the 2024-2025 academic year, the Free Application for Federal Student Aid (FAFSA) no longer requires students to report cash gifts from grandparents, including 529 distributions. In other words, your 529 plan for your grandchild won’t affect their financial aid.

Coverdell Education Savings Accounts (ESAs)

A Coverdell education savings account (ESA) also offers tax-free distributions, but annual contributions are capped at $2,000.

Custodial Roth IRA

If your grandchild has earned income, you or their parent can open a Roth IRA on their behalf. As of 2025, contributions up to (total, even if the child has multiple Roth IRA accounts) $7,000 or 100% of the child’s income amount, whichever is less grow tax-free, and qualified withdrawals are tax and penalty-free.

The main benefit to tax-advantaged accounts is that you can maximize the growth for your contributions by benefiting from tax advantages. The main drawback is there can be a lot of restrictions over when and how your grandchild can use the money. For example, even though taking money for a home down payment is a qualifying exception from penalties for a Roth IRA, this only applies to qualified first-time homebuyers and only for a maximum of $10,000.

Custodial investment accounts

A custodial investment account is an account that an adult manages on behalf of a minor. Minors can’t open their own brokerage account, so they can’t buy and trade stocks on their own. By contributing money to a custodial account like a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, you can secure a gift to your grandchild and take advantage of potential market earnings.

UGMA and UTMA accounts work in similar ways, the main distinction being that a UTMA can also hold physical property like a car. When your grandchild comes of age (e.g., 18 or 21 in most states), they take control over the account.

Custodial accounts can be simple to open and manage. UGMA and UTMA accounts offer some tax advantages on the investments’ earnings—as of 2024, the first $1,300 of earnings is exempt from income tax, and the next $1,300 is taxed at the child’s rate, which may be lower than an adult account owner’s.

A big advantage of a UGMA or UTMA is your grandchild can use the money for any purpose without penalties, compared to accounts like 529s that can only be used for something specific like education. There’s also no official maximum contribution amount (though you might choose to keep your gifts below the annual gift tax exclusion). That means more flexibility with your gift. Downsides include that there are fewer tax advantages than some other options and custodial account funds may have a greater impact on a student’s eventual financial aid package.

Savings bonds

U.S. savings bonds are a low-risk investment that allows you to lend money to the government in exchange for repayment with interest. This is generally considered low risk because the United States is unlikely to default on the loan.

There are two types of U.S. savings bonds: EE bonds and I bonds.

EE bonds are guaranteed to double in 20 years and earn a fixed interest rate (2.60% for bonds issued November 1, 2024 to April 30, 2025). You can buy bonds for a minimum of $25 and a maximum of $10,000 per year. Your grandchild can cash out a minimum of $25 of their bond as soon as one year, but they will lose the last three months of interest if they cash out before five years.

I bonds are structured to counter inflation. They have both a fixed interest rate and an inflation rate that changes every six months. New fixed and inflation rates are announced every May 1 and November 1. Whatever the fixed rate is when you buy the bond stays at that rate throughout the lifetime of the bond, but the inflation rate fluctuates, so when inflation increases, your interest earnings increase, too. You can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds per year. Like with EE bonds, you can cash out as soon as a year but lose three months of interest until the bond reaches the five-year mark.

You can get a federal tax exclusion on interest when you use EE or I bonds for qualified education expenses, or you can roll over the entire amount into a 529 plan.

Advantages of savings bonds include their safety as an investment and flexibility over how to spend the money. Disadvantages include that you might not have the same growth potential compared to other investments.

What’s the Best Way to Invest for Grandchildren?

There are many ways to give to grandchildren, and the “best” plan varies from one family to another. Consider these ideas to make a meaningful investment toward your grandkids’ future:

• Consider your priorities: Are you focused on funding higher education? Do you want grandchildren to take part in a cultural experience, like a visit to your homeland? Different options may offer more flexibility or tax advantages.

• Talk to your children: Your adult children may have preferences or ideas to make their contributions and yours go as far as possible.

• Consider combining options: You don’t need to choose just one approach. You might prefer to split a gift between a savings bond for guaranteed returns and a UGMA, or a custodial account for flexibility and a 529 plan for tax advantages.

Any gift you offer your family can show your love and pride in their achievements. When you look into your options, you may find ideas to create a strategy to make your gift have the impact you want on your grandchildren’s plans.

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