When you are planning for your child’s future, it is important to think about finances. However, it can be complicated to figure out kind of plan to put together for saving and providing financial stability. There are two popular savings options that often come to mind — the Roth IRA or the UGMA (Uniform Gifts to Minors Act) account.

While both can help set your child up for long-term financial stability, they serve very different purposes. Understanding how each works, their tax advantages, and their limitations, and more, can help you make the best choice for your family.

What Is a Roth IRA?

A Roth IRA is a tax-free retirement savings account that allows investments to grow. You can add your contributions after taxes. Therefore, the month can be withdrawn during retirement without taxes. In the case of your children, you can create a custodial Roth IRA if they are working.

There are several reasons to choose a Roth IRA, mostly due to its flexibility. You can withdraw contributions at any time without penalties. Although you cannot access your earnings, you don’t have to worry about the consequences of withdrawals. It allows you to work on building your wealth long-term. This also allows for learning financial responsibility.

What Is a UGMA Account?

A UGMA (Uniform Gifts to Minors Act) account is a type of custodial investment account. This account allows parents to invest money for their children. This type of account is flexible when it comes to income requirements, and is managed by a parent or custodian.

You can also invest a variety of assets, including cash, stocks, and bonds. These assets can be used for different expenses, not just college.

Tax Differences

A major difference between the two lies in how they’re taxed. With a Roth IRA, contributions grow tax-free and withdrawals in retirement are also tax-free. This makes it an excellent long-term investment tool.

In contrast, earnings in a UGMA account are subject to the “kiddie tax”, meaning a portion of unearned income may be taxed at the parent’s rate once it exceeds a certain threshold. While the first portion of earnings is tax-free and a small amount is taxed at the child’s rate, higher earnings could lead to a bigger tax bill.

Which Account Is Better?

The best option depends on your goals. If your main priority is building long-term, tax-free wealth for your child’s future — especially for retirement — a Roth IRA may be the stronger choice. It’s a powerful way to introduce your child to investing and the benefits of saving early.

However, if you want more flexibility in how the funds can be used, a UGMA account provides easier access. It’s ideal for general savings and allows you to give your child financial support for college, hobbies, or other major expenses before adulthood. Even if you get financial aid like FAFSA, there are always expenses.

The Bottom Line

Both Roth IRAs and UGMA accounts can play an important role in securing your child’s financial future, but they serve different purposes. The Roth IRA is better suited for long-term growth and retirement savings, while the UGMA is designed for more flexible, short-term use. For many families, a combination of both might be the best approach — using a UGMA for immediate needs and a Roth IRA to prepare your child for financial independence later in life.