6 Smart Ways to Gift Money to Children

1. 529 College Savings Plan

If your primary goal is to gift funds for education, look into opening a 529 plan as a first step. It's an education investment account offered by individual states, and earnings in the plan aren't taxable if the money is used for education expenses, such as college tuition, room and board or supplies. You can open an account with any state's plan, but your home state may offer state income tax breaks as an incentive to choose theirs.

There's no annual limit on contributions. The plan will have an overall contribution limit, typically up to $550,000. If your beneficiary withdraws the money for non-education expenses, investment earnings in the account will incur income tax, and there will be an additional 10% penalty in most cases. But you can change the beneficiary with no tax consequences if, for example, one of your children decides not to go to college and another does.

2. Custodial Accounts

Two common types of custodial accounts are those available under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). These accounts let adults save money for minor children, who then take over the account and can use the funds for any purpose. The age of majority depends on the state where you open the account, but is often 18 or 21.

The difference between UGMA and UTMA accounts is the type of assets that can be transferred to the child. A UGMA account is more limited, allowing you to save cash or invest in stocks for the beneficiary. A UTMA account allows you to gift cash, stocks, bonds, real estate and more.

You can contribute up to $19,000 in 2025 ($38,000 as a married couple filing taxes jointly) to a custodial account without paying gift taxes. Investment earnings are subject to income tax, though a certain amount of earnings may be taxed at the beneficiary's minor tax rate, which will be less than the parents' tax rate.

Learn more: Best Ways to Invest Money

3. Roth or Traditional IRA

Also known as a custodial IRA, a Roth or traditional IRA for kids is a retirement account an adult opens for a child who is working. It has the same contribution limits and tax treatment as a regular individual retirement account (IRA), but it belongs to the child, who gets access to the account automatically when they reach adulthood (typically age 18 or 21, depending on the state). The account remains an IRA, which the child can then continue to invest in for retirement.

The child must be earning their own money to qualify, but the money can come from babysitting or other non-salaried jobs. You as the initial account owner can contribute your own funds. Tax considerations depend on the account type: Investment earnings in a Roth IRA are tax-free at withdrawal in retirement. While that's not the case for a traditional IRA, you may be able to take a tax deduction on contributions to a traditional IRA.

4. Series I Savings Bonds

Series I bonds, or inflation-linked savings bonds, are a particularly low-risk investment that lets you avoid losing money due to inflation. They're offered by the U.S. Department of the Treasury and available to buy on TreasuryDirect.gov. The interest rate on an I bond is composed of a fixed rate and the inflation rate, and it goes up or down every six months based on changes to inflation. Through October 2025, the overall interest rate on I bonds is 3.98%.

You can buy I bonds in your own name, then cash them in and gift your child the proceeds. If you take this approach, you may be able to avoid paying federal income taxes. Interest income from the bond isn't subject to federal taxes if it's used for higher education expenses. Interest earned won't incur state or local taxes no matter how the money is used.

5. Trust

You can also gift money to children using a living trust, which is an estate planning instrument that contains your assets while you're alive and lets you make a specific plan for how to distribute them when you die. There are many different types of trusts, including revocable and irrevocable trusts.

A revocable trust lets the owner make changes during their lifetime, but creditors have the right to withdraw assets from the trust if you die with unpaid debt. The trust will also be subject to estate taxes if the assets in the trust add up to at least $13.99 million in the year of your death, as of 2025. In an irrevocable trust, the creator of the trust gives up ownership of it, can't easily make changes to it, and benefits from the assets being shielded from creditors and, typically, from estate taxes.

Learn more: What Is a Trust Fund?

6. Tuition or Medical Expense Payment

While paying gift tax is often a consideration when you want to gift money to children, there are two exclusions to the IRS rules: You won't pay gift tax when you pay tuition or medical expenses for someone else. That means you can make a direct payment to a college or health care provider on your child's behalf, and that money won't be taxable. You won't even need to report it as a gift on your tax return.

It's important to know that you won't qualify for the exclusion if you transfer the money to your child. Only funds given directly to the educational institution or medical entity for services provided to your child will count. Money for tuition can include payments to a private K-12 school or college, but cannot be used for child care or room and board. The medical expenses exemption allows you to cover your child's health insurance premiums or medical procedures.

Frequently Asked Questions

The Bottom Line

There are lots of ways to provide your children with a monetary gift during your lifetime or upon your death. Consider working with a financial advisor or tax professional to choose your best option. You may want to prioritize tax benefits for you, flexibility for your child or a combination of both, depending on how you want the money to be used and how your overall estate plan is structured.