Teaching Your Child About Money Early

Time is the advantage you actually have

Starting early matters because of compound interest — that just means the money your investment earns starts earning its own money too, on top of what you put in. The earlier you start, the more of the final balance is growth instead of your own deposits.

If you want to make it easy on yourself, set up an automatic monthly transfer into whichever account you choose. It takes the month-to-month decision out of your hands. And teach your kid what you're doing as you go — knowledge compounds just like money does.

529 plan — for education costs

Tax-advantaged, built for school expenses.

• Money grows tax-free and comes out tax-free when spent on qualified education expenses — that is the deal a 529 offers.
• For K-12 (elementary or secondary school), qualified use is capped at $20,000 per year per child for 2026 — this is a new, higher limit; the cap was $10,000 a year before December 31, 2025, so if you see the old number anywhere, it's out of date. K-12 qualified expenses aren't just tuition — they also cover books, tutoring fees, standardized test fees, and educational therapies for a student with disabilities.
• If you pull money out for something that isn't a qualified expense, the earnings portion of that withdrawal owes regular income tax plus a 10% federal penalty.
• Many states offer their own tax deduction or credit for 529 contributions — Kansas may have one, so check before you pick a plan. A plan from another state with lower fees can sometimes beat your own state's tax break, so weigh both.
• Leftover money isn't stuck. You can roll unused 529 funds into the child's own Roth IRA, but four limits apply together: the 529 account must be at least 15 years old; the lifetime rollover cap is $35,000; you can't roll money (or its earnings) that was contributed in the last 5 years; and each year's rollover still counts against that year's Roth contribution limit — which means a child with no earned income that year can't roll anything.

Custodial account (UGMA/UTMA) — it becomes the child's money

Easy to open. Not flexible the way it sounds.

• Because the money legally belongs to your child, it counts as the child's own asset on the FAFSA — which cuts need-based financial aid more than a parent-owned 529 does for the same dollars.
• Kiddie tax: a child's investment income (interest, dividends, gains) above $2,700 (2025 and 2026) can be taxed at the parent's tax rate on IRS Form 8615. If the child's interest and dividends stay under $13,500, a parent can instead elect to report it on their own return using Form 8814 — that $13,500 figure is from the 2025 instructions; confirm the 2026 number once IRS publishes it.

Roth IRA — only once your child has their own earnings

The strongest long-term account, with one gate most people miss.

• A Roth IRA can only be funded up to your child's own taxable compensation for the year — real earned income from a job. Allowance, gifts, and investment income do not count. There is no minimum age to have one — the IRS is explicit that you can be any age — the only requirement is that the child actually earned the money.
• The most anyone can contribute is the lesser of the annual limit ($7,500 for 2026 — confirm the current-year number at IRS.gov before you contribute) or the child's own compensation for that year.
• The part most explanations leave out: the money your child puts in is not locked away. Withdrawals come out in this order — your own contributions first, then any converted amounts, then earnings last — and a withdrawal of your own regular contributions is not taxed and carries no penalty, at any age, for any reason. It is only the earnings on top of that money that require a qualified distribution — generally the account being open 5 years and the owner turning 59½, or an exception for death, disability, or up to $10,000 toward a first home — to come out tax-free.
• If your child doesn't have earned income yet, a Roth isn't closed to them forever — it's just not open yet. A 529 or custodial account works in the meantime, and a Roth becomes available the year they have a real paycheck.
• For your own Roth: if you're a servicemember, nontaxable combat pay still counts as compensation for IRA purposes even though it's excluded from your taxable income — so a deployment doesn't stop you from contributing to your own Roth on the strength of it.

Gifts, and what fees quietly cost you

• The annual gift tax exclusion is $19,000 per recipient for both 2025 and 2026. That's per giver, per child — so two parents, or two grandparents, can each give $19,000 to the same child in one year with no gift tax paperwork required.
• My own view, not an IRS rule: for birthdays and holidays, I'd rather put money into one of these accounts for a child than buy another toy. That's just my opinion — take it or leave it.
• Watch what a fund costs you. The SEC's own example: $100,000 growing at 4% a year for 20 years ends near $208,000 in a fund charging 0.25% a year in fees, but only near $179,000 in one charging 1.00% — same money, about $29,000 less, from fees alone. Index funds often cost less because no one is actively picking stocks, but the SEC is clear that not every index fund is cheap, and that any fund — index or not — carries risk and can underperform after fees. Check the expense ratio in the fund's prospectus before you buy. I won't recommend a specific fund here — that's a decision for you and your own broker or advisor to make.

This is general information, not advice for your situation

• I'm giving you the rules as the IRS and SEC publish them, not a recommendation for what you personally should do. Talk to a tax preparer or financial advisor before you open an account.
• The Kansas rules on this page — the ages a custodial account hands over — are Kansas law. If you live somewhere else, check your own state.
• Dollar limits change most years. Where I printed a number, I printed the year it's good for — check IRS.gov or Investor.gov for the current figure before you rely on it.