How to invest on a child’s behalf

5 mins readLast updated October 4, 2023by Karen Barrett

Investing money on behalf of your grandkids can leave them with a large pool of savings to fund their future needs. Find out more.

Investing on behalf of your grandchildren can make a meaningful impact on their lives and financial security. There are many ways to invest money on a child’s behalf, but depending on your financial circumstances, some options may be better than others. So which method is right for you? We take a look.

Why use your money to help your grandkids?

Investing money on behalf of your grandkids can set them up for a bright financial future. Whether your grandkids are planning to go to college or want to start planning for their financial futures, using some of your money to help them build their wealth can be a major boost.  

No matter your financial circumstances, even small contributions — when done wisely — can lead to a larger reward in the future. And with many digital tools only making it easier for you to invest wisely for your grandkids’ futures, making the right investment is easier than ever.

What are the best ways to invest on a child’s behalf?

There are a wide range of effective methods for investing on behalf of a child, but the right way to do it depends on your own circumstances and planning. For example, if you wanted to invest a lump sum into an account where it can compound over time to help pay for tuition costs, you may want to open an educational savings account.    

Or, if you wanted to buy stocks and shares to hold in a child’s name, you will need a custodial brokerage account. From regular, long-term contributions to lump sums to stocks and shares, there are a wide range of options open to you. Let’s take a look at some of the most popular methods. 

What educational saving plans are there?

There are two main types of educational saving plans. The first is the 529 Plan. A 529 plan is a savings account that helps parents and grandparents invest towards a child’s educational costs. There are no contribution limits, and anyone can open and manage an account.  

There are two types of 529 plan: A tuition plan where college credits are purchased directly, or a more traditional savings account where contributions are deposited, invested and then grow over time. The money in the account can be withdrawn without any penalty for use with any qualified educational need. However, the funds in a 529 account can only be used to pay for tuition costs. 

The second option is the Coverdell Education Savings Account. This is a government-backed account designed to support students under the age of 18 whose income drops below a certain level. Unlike the 529 plan, which can only be used to contribute to tuition costs, the Coverdell account can cover tuition costs as well as other education expenses, such as books. 

Contributions to the Coverdell account are made tax-free, but unlike the 529 plan, an annual limit of $2,000 per beneficiary exists, so the Coverdell account is better suited to more long-term contributions rather than larger lump sums. For a larger amount, a 529 plan may be more suitable. 

What are custodial brokerage accounts?

A custodial brokerage account is an account officially owned by a child, but held in the custodial care of a parent or grandparent until the child is old enough to take full ownership. In the meantime, the relative can use the account to make direct investments into stocks and shares, ETFs, mutual funds or other stock market options.  

Some of the most popular custodial brokerage accounts are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) accounts. Any relative can make contributions to these accounts, and the returns generated on these investments can be used for anything that benefits the child. In practice, this type of custodial account is an investment account for the child, run by a relative. If you are looking to invest your own money to create larger returns for a child, a custodial brokerage account may be a good option.  

It should be noted, however, that as these accounts can be used to benefit a child in any number of ways, they aren’t necessarily as tax efficient as some others. Certain investments may be liable for capital gains tax or income tax based on the custodian’s own tax bracket, and Kiddie Tax, which means certain investments could be taxed as part of the taxable income of the child. 

What is a Custodial Roth IRA?

If your kids or grandkids are earning some income from a part-time job, they may be able to open a Custodial Roth IRA. This Roth IRA works in the same way as a traditional Roth IRA, but with the exception that until the child is 18, or 21 in some states, the parent that opens the account is largely responsible for it.  

The child will make contributions from their pay stubs directly into the account. As with a normal Roth IRA, these contributions will be invested and will slowly compound over time in a tax-efficient way.  

The money in a Custodial Roth IRA can start to be accessed once the account has been open for around five years, meaning your grandchild can draw on the account’s contributions to make down payments for larger purchases such as cars or real estate deposits. The funds can also be used to pay for educational needs. This is a good option for parents and grandparents looking to encourage a young child to save effectively with their own pay stubs.  

Which option is best for me?

There are many ways of making a lasting financial contribution to your grandkids. Which option is right for you depends on your financial circumstances and how you plan to invest. 

If you’re unsure how to go about it, then it’s worth speaking to an independent financial advisor. They’ll take the time to find out your investing goals and recommend the right products and strategy to help you meet them.

Karen is the Founder and CEO of

Karen Barrett

Karen Barrett is the Founder and CEO of, the site that empowers people to make confident financial decisions. Karen, has been shortlisted for Scale-Up Entrepreneur of the Year at the Great British Entrepreneur Awards and British Businesswoman of The Year Finalist.