Best ways to save money for your grandchildren
Key takeaways
- High-yield savings accounts offer flexibility and competitive rates for short-term savings goals.
- 529 education savings plans provide tax-free growth for qualified education expenses, with no annual contribution limits.
- Custodial accounts (UGMA/UTMA) transfer ownership to grandchildren at adulthood, typically ages 18-21 depending on state.
Saving for your grandchildren can help minimize the financial burdens they may encounter as they mature. Whether it’s paying for college, buying a first home or providing a safety net in an uncertain job market, these funds can make a significant difference. Many grandparents also find that saving for grandchildren allows them to leave a lasting legacy that extends beyond their lifetime.
The key is choosing the right savings vehicle that balances growth potential, tax advantages and your control over the funds. Start early to maximize the power of compound interest. A $10,000 investment earning 6 percent annually grows to almost $30,000 over 18 years.
Where to store savings for grandchildren
The first step to establishing savings for your grandchildren is finding the right account to keep them in. Options vary in terms of their purpose, flexibility and potential for growth.
1. High-yield savings accounts
High-yield savings accounts are often overlooked for grandchildren but offer advantages for flexible, accessible savings. Currently offering rates over 4 percent APY, these accounts provide competitive returns while maintaining full liquidity.
Unlike other savings vehicles, high-yield savings accounts don’t restrict how funds can be used, making them ideal for goals beyond education. Because the account is in your name (not your grandchild’s), you maintain complete control over the account and funds can be accessed immediately for emergencies or opportunities.
The main drawback is that interest earnings are taxable (paid by the account holder), and there are no special tax advantages like other education-focused accounts.
2. 529 college savings plans
These state-sponsored education savings plans can be opened by anyone for a single beneficiary. While primarily designed for higher education costs, 529 plans can also pay for K-12 tuitions up to $10,000 annually, apprenticeship programs and student loan repayments.
The money in a 529 plan grows tax-free and withdrawals for qualified education expenses are also tax-free. If funds are used for non-educational expenses, however, they will be subject to tax and a 10 percent penalty on the earnings portion.
Unlike custodial accounts, ownership of a 529 plan does not automatically transfer to the named beneficiary once they reach adulthood. You control the account even as the grandchild enters college. You can even change the beneficiary to a different grandchild with no tax consequences if there are leftover funds.
Keep in mind: Multiple family members can open separate 529 plans for the same beneficiary without issues. However, it’s wise to coordinate with parents to avoid over-saving and to ensure optimal tax benefits. Some families prefer that grandparents contribute to an existing parent-owned 529 rather than opening a separate account, as this can provide better financial aid treatment.
Read more: How to open a 529 college savings plan.
3. Custodial accounts (UGMA/UTMA)
Custodial accounts, like Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, are ideal ways to set aside money that’s controlled by an older relative until the grandchild reaches adulthood.
UGMA accounts hold financial assets, while UTMA accounts can hold any type of property, tangible or intangible. Custodial accounts can be opened at most large banks and brokerages. The custodian who manages the account can withdraw funds for expenses benefiting the child, giving these accounts a high degree of flexibility.
The primary consideration is that ownership automatically transfers to the child at the age of majority (18-25, depending on the state), at which point they can use the funds for any purpose. Keep in mind that this transfer can reduce the child’s financial aid eligibility. It’s a good idea to consult the parents before opening up an account, as it gives the child direct access to money at a young age.
4. Certificates of deposit (CDs)
Certificates of deposit can be opened at most banks and credit unions and offer a guaranteed rate of return over a specific period, ranging from a few months to several years. CDs lack the flexibility of a high-yield savings account — early withdrawal usually incurs a penalty. However, a high-yield savings account’s yield fluctuates over time, whereas you can lock in at a good rate with a CD.
For example, investing $2,000 into a competitive one-year CD with a rate of 4.10 percent APY or more could earn you $82 by the time your term is up. CDs could be a great option for investing in shorter-term goals for your grandchildren.
Lock in competitive rates for your grandchildren's future with Bankrate's best CD rates.
As with a high-yield savings account, CD interest is taxable income. You’ll need to pay taxes on it annually, even if your CD hasn’t matured yet. Make sure to factor these taxes into your budget, especially if you are on a fixed income.
5. Series I or EE bonds
These savings bonds can be purchased directly from the U.S. Treasury through the TreasuryDirect website. Series EE bonds earn a fixed rate for 30 years (or until they’re cashed), and the Treasury guarantees they will double in value in 20 years, even if additional money needs to be added by the federal government to make that happen.
The Series I bonds are also low-risk and provide some protection against inflation by having a combined fixed rate and a variable rate that’s adjusted twice a year for inflation.
Both bonds can be cashed in by a grandchild anywhere between one year and 30 years after they’re opened, though if cashed in before five years, there’s a penalty of three months of interest.
Earnings are federally taxed, though you have the choice between reporting earnings annually or reporting them when you cash the bond in.
6. Youth savings accounts
Many banks and credit unions offer savings accounts designed for children and teens, often with low or no fees and helpful tools to teach kids about finance. An adult can open a joint account with the grandchild, whether that’s the grandparent or another guardian.
Having a joint savings account gives your grandchild an opportunity to learn about banking transactions firsthand. Using online access, they can regularly monitor their savings growth. This can open up discussions about saving, interest and financial responsibility.
The potential for growth may be lower with youth savings accounts than with some other options. But you can still find some attractive rates if you shop around, with some accounts paying over 3 percent APY for smaller balances.
How to build savings for your grandkids
Building savings for your grandchildren isn’t just about stashing away money. It’s a process that requires consistency, planning and effective use of financial resources. Use practical steps to create a robust financial legacy.
1. Develop a savings plan
Start by outlining your grandchild’s potential needs and your specific financial goals. How much do you intend to save, and by what age do you hope your grandchild will start using the funds? Setting clear objectives will guide your saving strategy and keep you on track.
Consider factors like current education costs, timeline until the funds are needed and your own retirement security.
Students pay $11,610 per year on average in tuition and fees at public, in-state schools, and $30,780 for out-of-state schools. Room and board can add more than $13,000 in annual costs.
2. Make regular contributions
A simple yet effective savings strategy is making consistent contributions, even if they’re a small amount. Those small amounts will build up over time and earn more as they compound.
Set up automatic transfers from your account into a grandchild’s savings account so you don’t have to remember to make regular transfers. Typically, automated savings transfers can be set up through a mobile banking app or online banking portal. You can designate a specific amount to be transferred at regular intervals, such as monthly or bi-weekly.
3. Incremental increases
As you more effectively budget and invest, consider gradually increasing your contributions over time. If you’re working, these increases could come in line with salary growth or bonuses.
4. Diversify investments
One way to grow your savings is to invest in diverse assets. The intention behind distributing investments among various opportunities is to spread your risks. A mix of different types of investments — such as stocks, bonds and mutual funds — can help protect against market volatility and provide a potential for better returns in the long run.
5. Review and adjust
Regularly review your savings strategy as your life situation changes. Maybe you land a higher-paying job and can contribute more, or your grandchild earns a scholarship, decreasing their future education costs.
The earlier you start saving for grandchildren, the more time compound interest has to work in your favor. Even small, consistent contributions can grow substantially over time. I recommend grandparents start with whatever amount feels comfortable — even $25 per month can make a difference over 18 years.— Hanna Horvath, CFP & Bankrate Banking Editor
Tips for saving during retirement
If you’re retired or close to it, striking a balance between saving for your grandchildren’s future and fully enjoying your retirement can be challenging. But there are still ways to save even if you’re past your working years.
- Maximize Social Security benefits: By delaying your Social Security benefits until you reach your full retirement age or even later, you can increase your monthly payouts. This increases your retirement income, freeing up more cash for enjoyment and savings.
- Review insurance policies: As you age, your insurance needs can change. Review your policies regularly to ensure you aren’t over-insured and paying for unnecessary coverage. The money saved can be directed toward a savings or custodial account.
- Leverage tax-advantaged accounts: A tax-advantaged account like a Roth IRA lets your money grow even into retirement. You can generally withdraw this money tax-free and contribute it toward your grandchild’s savings. Keep in mind that you need to be earning an income in order to be eligible to contribute to an IRA.
- Turn your passion into profit: Whether it’s baking, woodworking, gardening, writing or another interest, there’s likely a market for your hobby. You could sell craftwork through an online marketplace like Etsy or offer local classes, for example. This can not only offer an opportunity for additional income, but also add a fulfilling and enjoyable dimension to your retirement years.
- Plan your estate: Consider your grandchildren in your estate planning. You might set aside a portion of your estate to be inherited by your grandchildren, ensuring their financial wellbeing long after you’re gone.
Money tip: Before contributing to grandchildren’s savings, ensure your own retirement is secure. Financial advisors recommend the “oxygen mask” principle — secure your own financial future first, then help others. This ensures you won’t become a financial burden while still being able to help your grandchildren.
Bottom line
Through understanding your options for storing savings and implementing strategies to grow them over time, you can ensure that you’re making the most of your financial contribution to your grandchild’s future. Foresight and planning will not only benefit grandchildren in the long run, but will also serve as an example of good savings habits that you can pass along to them.
Ready to start saving for your grandchildren? Compare Bankrate’s best savings accounts and top CD rates to find the right combination for your family’s goals.
Why we ask for feedback Your feedback helps us improve our content and services. It takes less than a minute to complete.
Your responses are anonymous and will only be used for improving our website.
