Saving for your child’s future doesn’t always mean using a 529 plan. Learn how a brokerage account can provide flexibility and control for college savings, future home purchases, business funding and other family goals.
By Plumb Financial
What is the best way to save for your child’s future?
It’s a great question—and there isn’t one answer that works for every family.
When parents and grandparents start saving for their children’s future, the conversation often centers around college savings. Should you use a 529 plan? A custodial account? A brokerage account? And what happens if your child doesn’t ultimately need the money for college?
I’ve had many families ask these questions, especially as new savings options and strategies continue to generate conversation.
Today, let’s look at another option: using a brokerage account to save for your child’s future.
A brokerage account may provide more flexibility than an account designed specifically for education. But that flexibility also comes with different tax considerations.
So let’s look at how it works.
A brokerage account is an investment account that allows you to invest money in assets such as stocks, bonds, mutual funds and ETFs.
Unlike a 529 college savings plan, a taxable brokerage account isn’t restricted to qualified education expenses.
That can make it appealing for families who aren’t sure exactly what they want the money to be used for.
Maybe the goal is college.
Maybe it’s a future down payment on a home.
Maybe it’s helping your child start a business.
Maybe it’s a wedding.
Or maybe you simply want to build a pool of assets that can eventually help your child get started in adulthood.
The money doesn’t have to be limited to one purpose.
That flexibility is one of the biggest advantages of a brokerage account.
One of the first questions to consider is:
Who should own the account?
There are several ways a family can structure an account intended for a child’s future.
A parent can maintain an investment account in their own name and designate the money for a child’s future.
This gives the parent control over the account.
There isn’t a requirement that the money automatically transfer to the child when they reach a certain age simply because it was saved with the child in mind.
The parent remains in control and can decide when and how to use the assets.
That may be particularly attractive to parents who want to maintain control over their financial resources while their children are young.
Another option is a UTMA account, or Uniform Transfers to Minors Act account.
A UTMA account allows an adult to contribute assets for the benefit of a minor.
The child is the beneficiary of the account, and the assets are held for that child.
One important difference is ownership.
With a UTMA account, the assets ultimately belong to the child, and control transfers to the child when they reach the applicable age under state law.
That age can vary by state and account circumstances.
So if you’re considering a UTMA account, it’s important to understand the rules that apply where you live.
Let’s say you start saving for your child’s college education when they’re young.
Years later, your child receives a full scholarship.
Fantastic!
But now you may have a different question:
What should we do with all the money we saved?
With a brokerage account, you aren’t limited to using the money for qualified education expenses.
Depending on how the account is structured and who owns it, the assets could potentially be used for another financial goal.
For example, you might eventually use the money to help your child:
Or you may decide that the money should remain part of your own financial plan.
That’s a very different type of flexibility than you have with an account specifically designed around education expenses.
This is where you need to be careful.
A brokerage account doesn’t have the same tax advantages as a 529 plan.
With a 529, qualified withdrawals can receive favorable federal tax treatment.
A taxable brokerage account doesn’t work that way.
If investments in the brokerage account generate taxable income or you sell an investment for a gain, there may be tax consequences.
For example, if you purchase an investment for $10,000 and later sell it for $15,000, the $5,000 gain may be subject to capital gains tax, depending on the circumstances.
The timing and type of income matter.
And some investments can generate taxable income even if you don’t sell the investment.
That’s why the investment strategy inside a taxable brokerage account matters.
When you’re saving for a child’s future, you may have a long investment time horizon.
That can provide an opportunity to invest for growth—but it also means you need to think carefully about risk.
A brokerage account might hold investments such as:
The right mix depends on how long you have before the money will be needed, your tolerance for investment risk and what you’re trying to accomplish.
A family saving for a 5-year-old’s college education has a very different timeline from a family whose child is entering college next year.
As the goal gets closer, the investment strategy may need to change.
The account is only one piece of the strategy. What you invest in—and why—matters, too.
This is an important distinction between a parent-owned brokerage account and a custodial account such as a UTMA.
Parents sometimes say:
“I want to save money for my child, but I don’t necessarily want them to automatically receive control of it when they reach a certain age.”
A parent-owned brokerage account can provide more control over when and how those assets are ultimately gifted.
That may be important if you’re trying to coordinate your child’s financial needs with your own retirement and wealth-building goals.
It also gives you the ability to reassess your plan as your child gets older.
Because let’s be honest:
You don’t know at age five exactly what your child will need at age 25.
Your financial plan should have room to adapt.
Let’s take the devil’s advocate approach for a moment.
What if your child receives a full scholarship?
What if they don’t attend college?
What if they become financially independent?
What if they don’t need your financial assistance?
Or—perhaps most importantly—what if your family’s circumstances change?
With a parent-owned brokerage account, you retain control of the assets.
You may decide to continue investing the money.
You may use it for another child.
You may eventually gift it to your child.
Or you may decide that the money should become part of your own retirement or financial plan.
That flexibility can be valuable.
Of course, if you’re using a UTMA account, the rules are different because the assets belong to the child.
So which is better?
That’s the wrong question.
The better question is:
Which account best fits what you’re trying to accomplish?
| Feature | Brokerage Account | 529 Plan |
|---|---|---|
| Designed specifically for education | No | Yes |
| Flexible use of funds | High | More restricted |
| Parent can maintain ownership | Yes, if parent-owned | Generally yes |
| Tax-deferred growth | No | Yes |
| Tax-free qualified education withdrawals | No | Yes |
| Investment options | Depends on brokerage | Depends on plan |
| Can potentially be used for other family goals | Yes | Certain options may apply |
| Taxable investment income/gains | Yes | Generally tax-advantaged within the plan |
The important thing is that there isn’t a universal answer.
Some families may benefit from a 529.
Others may prefer a brokerage account.
And some families may decide to use more than one strategy.
This is one of the most important principles I talk about with clients:
Don’t choose the financial tool before you know what you’re trying to accomplish.
Start with the goal.
Ask yourself:
Is it:
Then ask:
Who needs to maintain control of the money?
And:
How much flexibility do we want?
Once you understand the goal, you can begin evaluating which financial tools may make sense.
That’s where financial planning becomes more than simply opening an account.
It’s about making sure the account, investments and tax strategy all work together.
Every family is different.
Some parents know exactly what they want to fund.
Others aren’t sure whether their children will attend college, start a business, buy a home or take another path entirely.
That’s okay.
Your savings strategy doesn’t have to predict your child’s entire future.
It simply needs to give your family the best opportunity to support the goals that matter to you.
A brokerage account for college savings may be one option worth considering when flexibility and control are important.
But it’s not the only option.
At Plumb Financial, we believe the plan comes first.
First, determine what you want your money to accomplish. Then choose the tools that can help you get there.
If you’re trying to decide between a 529 plan, brokerage account, UTMA or another savings strategy for your children, let’s have a conversation.
Your family’s financial plan should be designed around your goals—not someone else’s checklist.
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