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As a new parent, there are many details to plan for. Yet saving for your child’s future is an important financial responsibility that you may want to start preparing for sooner rather than later.
The good news is there are many options available for starting a savings fund for your baby. And even if you only have the ability to put away a few extra dollars each month, making a consistent habit of saving for your child could produce big benefits over time.
How to start a savings fund for a baby
When you’re ready to begin saving cash for your baby’s future, you may want to consider setting up a designated, separate account to hold the money. The best savings funds for babies and children feature above-average returns, low fees, and potential tax benefits.
Here’s a look at four smart ways to start a savings fund for a baby, depending on your goals.
1. Open a high-yield savings account
Opening a savings account for your baby can be an easy, low-risk way to stash away cash for your child’s future. So, if you plan to open a savings account for a child, you may want to consider whether a high-yield savings account (HYSA) might be a good fit for your goals.
High-yield savings accounts are deposit accounts that typically offer above-average interest rates compared to traditional savings accounts — as much as 10 times the national average. And if you open a HYSA with an FDIC-insured bank, you can trust that your deposits are safe (up to $250,000 per depositor, per account ownership category).
One downside: High-yield savings accounts come with variable interest rates that can go up and down with market conditions. Plus, despite competitive rates compared to other types of deposit accounts, they still don’t match the returns you can achieve by investing in the market.
High-yield savings accounts are commonly found at online banks, but you should also check with traditional banks and credit unions. It’s wise to compare multiple HYSA account options to make sure you find the best rates and account terms available.
Read more: The 10 best high-yield savings accounts available today
2. Consider UGMA or UTMA accounts
Another way to save money for your baby is to open a custodial account. These types of accounts allow you to save and invest money on your child’s behalf.
Custodial accounts come in the following two main varieties:
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Uniform Gifts to Minors Act (UGMA) accounts: UGMA accounts can hold cash and financial investments. You can open these accounts on behalf of a minor family member in all 50 states.
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Uniform Transfers to Minors Act (UTMA) accounts: UTMA accounts can hold cash, financial investments, real estate, and other types of property. You can open these accounts on behalf of a minor family member, but they're not available in all 50 states.
These custodial accounts have no annual contribution limits, but the IRS does impose a gift tax if you deposit over a certain threshold. The federal gift tax limit for 2025 is $19,000 per individual and $38,000 per married couple.
3. Gift a certificate of deposit (CD)
Gifting a certificate of deposit (CD) is another option to consider if you’re looking for ways to invest money for your baby’s future. A CD can be appealing because it offers a fixed interest rate for the entire term (which can range from a few months to several years), which can be particularly beneficial in a falling interest rate environment.
The catch is that you must keep the money you deposit in a CD in the account until it reaches maturity. Otherwise, you’ll be subject to an early withdrawal penalty.
If you want to gift a certificate of deposit to your child, you first need to open the CD as a custodial account — either a UTMA or UGMA (see above). This means your child won’t own the CD, at least not until they reach adulthood. And since the age of adulthood varies on a state-by-state basis, the process of transferring the CD to your child once they’re old enough can differ.
With a UGMA account, your child would need to withdraw the cash from their CD between the ages of 18 and 21 (depending on the state of residence). A UTMA account, by comparison, lets you, as a parent, make withdrawals for the benefit of your child at any time. Once your child (aka the beneficiary) reaches adulthood (18 to 21, depending on the state of residence), they can take control of the CD.
Read more: Can you gift a certificate of deposit?
4. Start a 529 plan
As a parent, one of the biggest expenses you may need to plan for when it comes to your child is their college education. A 529 plan could be a great tool to help you accomplish that goal.
A 529 plan is a tax-advantaged, flexible savings plan you can use to pay for educational expenses. Parents, grandparents, and other family members can contribute to the 529 plan as well. Plus, you can invest the money in potentially high-return stock funds on behalf of your child, who is the beneficiary. Additionally, as long as the beneficiary uses the money for qualified educational expenses, they won’t have to pay taxes on any gains.
You may even be able to open a 529 plan for an unborn child if you want to start saving money early. Technically, you would name yourself as the beneficiary in this situation and list your baby as the beneficiary once they receive a Social Security number.
It’s also possible to change the beneficiary on 529 plans, giving parents more flexibility than some other savings products. But you should also consider the limitations of 529 plans (like the fact that you can only spend the money on educational expenses) before you open this type of account.
Bottom line
There’s no one-size-fits-all solution when it comes to saving money for your child. Depending on the financial goals you want to achieve, opening more than one type of savings fund for your baby might be the best option.
Keep in mind that it’s also fine to ask for advice if you’re not sure where to start. A trusted financial advisor can help you work through your financial priorities and create a financial plan that makes sense for your family—especially when you’re undergoing a major change like adding a new child to your household.
Finally, remember that you don’t have to start with a huge savings goal if doing so isn’t affordable right now. Even if you can only afford to save a few extra dollars per month for your baby, creating the habit of saving is what matters most.
