How Grandparents Can Invest for a Newborn: 5 Options

New grandparents sitting on a couch feed their infant grandchild. — (Image credit: Getty Images)

Becoming a grandparent for the first time is a special experience. And if you're well-off, you may be eager to start supporting your grandchild from the moment they enter the world.

Even if you're a seasoned grandparent, some rules may have changed since your last grandchild was born. Moreover, you may wish to invest in a Trump Account — just launched in mid-2026.

Here are five account options to consider, along with their respective benefits, drawbacks, and potential tax implications.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

1. 529 plans for education expenses

For grandparents who value education, a 529 plan can be a smart account to fund.

"Contributions are not deductible on the federal return, but some states do provide tax benefits for the contributor," says Caleb Moyer, CFP, CFA, EA, and owner of Moyer Tax Services. Moyer also explains that 529 investments grow tax-deferred, and distributions used for qualified education expenses are tax-free.

Moyer says 529 plans offer major benefits for educational savings.

"A grandparent can make a gift to the 529 for the child’s benefit but yet retain some control over the account, including the ability to change beneficiaries. The account owner, not the beneficiary, also typically controls when distributions are made."

Moyer also points out that through a so-called "grandparent loophole," the Free Application for Federal Student Aid (FAFSA), will not count withdrawals from a grandparent-owned 529 account as part of a student's income when applying for financial aid. (Note that more than 200 private institutions, including most Ivy League schools, use the CSS Profile, which may consider grandparent-held 529 plans.)

Plus, he says, "Current rules also provide some flexibility if the beneficiary doesn’t end up needing all of the money for education, including one option to roll over a long-standing 529 account to the beneficiary’s Roth IRA."

The cap on such rollovers is $35,000 per beneficiary. A bipartisan Senate bill would eliminate the cap altogether, giving your grandchild much more flexibility if they decide not to go to college or don't spend down their 529 plan. That proposal may not pass, however.

While 529 plans have their benefits, Sean Mullaney, financial planner and president of Mullaney Financial & Tax, Inc., warns that these accounts can be quite restrictive.

"With a 529, you're signing up for handcuffs." — Sean Mullaney

It's not that a 529 plan can't ever be a good idea, Mullaney explains. But he feels they should have a specific use case.

"I tend to like funding a 529 only when we have a demonstrably academically inclined child," Mullaney says. Otherwise, he warns, you could end up scrambling to put the funds to good use to avoid a penalty.

Since there's no way to know if your infant grandchild will be college-bound, it makes sense to make more modest deposits when the child is young. Then, when the child is older, you can "superfund" a 529 plan by front-loading up to five years' worth of annual gift-tax exclusions into a single year.

Keep in mind that you may also pay school or college tuition directly.

2. UTMA accounts

UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts that allow an adult to manage investments for a minor. Compared to a 529 plan, UTMA accounts are much more flexible, says Moyer. However, he says, the tradeoff is control.

"The gift from the grandparent to the newborn is irrevocable right away," he says. "When the child reaches the applicable age under state law … the account control transfers to them. At that point, the beneficiary can use it for whatever they want, even if it is something the grandparent wouldn’t have wanted it to be used for."

UTMA accounts also carry additional tax consequences, Moyer cautions.

"They do not get tax-deferred growth, so dividends, interest, and capital gains must be reported," Moyer says. "If a child has enough unearned income, they may be subject to 'kiddie tax,' where they pay the tax rate of their parents on unearned income over a certain amount."

Plus, Moyer cautions, "UTMA accounts are also reportable assets owned by the child on FAFSA, meaning it could hurt their chances of receiving financial aid."

3. Trusts

As a grandparent, you can use different types of trusts to set your grandchild up financially.

"A trust starts to make sense when the grandparent’s goal is larger than simply helping with college," Moyer says. "A trust could allow the grandparent to specify when and why money becomes available to the beneficiary, such as for buying a first home, education, healthcare, or other purposes."

A trust can also be structured to give a beneficiary full access to the money at a certain future age. That said, Moyer says the downside of a trust is complexity.

"Unlike a 529 or UTMA account, a trust would require an estate planning attorney, a trustee to administer the trust … and the trust may have its own tax return and other reporting requirements."

Moyer also says a trust will likely impact financial aid.

"It would likely be considered an asset of the beneficiary, even if they cannot access it for education purposes."

Another downside of trusts is their compressed tax brackets. Retained trust income hits the top federal marginal income tax rate (37%) at very low income thresholds (just over $15,000), making tax drag a significant consideration.

4. Trump Accounts

Trump Accounts are a recently launched savings option that grandparents can help fund. Money in these accounts is invested in low-cost index funds, gains are tax-deferred, and distributions are restricted until the beneficiary turns 18. At that point, beneficiaries get control of their accounts, which effectively convert to a traditional IRA.

Mullaney says one problem with Trump Accounts is that they're brand new, so it's hard to know how beneficial they might ultimately be overall.

"529s have been around for decades," he says. "These plans have decades of managing assets, being legitimate, having account controls, and there's natural competition because states have their own plans."

With Trump accounts, "There's really no reason to rush in. We can let a little financial history play out." — Sean Mullaney

Mullaney also points out that Trump Accounts offer no tax deduction for contributions. And it's still unclear how these accounts might affect financial aid.

However, he says it generally pays to open one for children born between 2025 and 2028 who are eligible for a $1,000 seed payment. Mullaney also likes the idea of converting a Trump Account to a Roth IRA once a recipient turns 18, though this would be a taxable event. Getting the exit strategy right is critical.

While parents generally establish and manage a Trump Account, grandparents can contribute funds to an existing account. The annual cap for all contributions is $5,000 per child, not counting the $1,000 seed contribution.

5. Taxable brokerage accounts

Taxable brokerage accounts, as the name implies, do not offer tax benefits like the tax-deferred growth you'll find in 529 plans and Trump Accounts. But Moyer says these accounts are worth considering.

"Having that account grow, and then gifting assets to the child when they need it, retains control for the owner [and] helps avoid FAFSA impacts," he says. Plus, he points out, funds in a taxable brokerage account can cover tuition payments for a grandchild's education, future healthcare needs, and other potentially costly expenses.

Mullaney says that for the typical affluent person, "The best tax rule available to them, the one that will benefit the grandchild the most, is the step-up in basis at their own death."

When a grandchild inherits a taxable brokerage account, the assets' cost basis resets to their fair market value on the date of the grandparent's death. The grandchild will owe capital gains tax only on growth after that date, making it an extremely tax-efficient option.

Of course, the downside is that with this strategy, you won't be around to see your grandchild reap the benefits. However, you could also take a hybrid approach, withdrawing strategically to support a grandchild's needs while leaving a balance to grow and transfer upon your passing.

It starts with setting a goal

Sharing your wealth with a grandchild is a tremendous gift. If you're not sure which account to use, Moyer suggests first identifying your goals.

If your primary goal is to fund an education, your approach may differ from one focused on helping support a first home purchase. Once you've done this exercise, Moyer says, you should be in a better position to determine which account, or combination of accounts, is best based on how much flexibility and control you want to maintain.

Maurie Backman is a freelance contributor to Kiplinger. She has over a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. She has written for USA Today, U.S. News & World Report, and Bankrate. She studied creative writing and finance at Binghamton University and merged the two disciplines to help empower consumers to make smart financial planning decisions.