How to Make Your Child Absurdly Wealthy for Absurdly Little

0:00Open the account, automate contributions, invest in growth, and leave it alone. eerily similar to what we talk about doing with our own accounts. Do that, and your kid will have millions of dollars by the time they retire. Not because you paid for everything, but because you gave them 20 extra years of compounding that they can never get back. Hello, friends. This is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

0:38So let's get started and get you one step closer to where you need to be. Welcome back to another episode of Your Money Guide on the Side. Today we're revisiting one of the most popular episodes we've ever done, how to help your kid become a millionaire, or a multi-multi-millionaire, for very little. Last year's episode on this topic was one of the most listened to in 2025, and the number one question I got wasn't, is this real? Or are you exaggerating? It was, wait a minute, how big is that final number? And I get it. Because when you hear that contributing$3 ,000 a year for a decade can turn into$3.6 million by the time your kid is 65, it kind of sounds like financial clickbait.

1:28But I assure you, it's not. I don't play that game. It's basic math. It's compounding over 55 years. That's 55 years of growth you can't replicate if you wait until they're 20 to start. And when we tend to think about investing and compound interest, we also usually think about our own timeline. If you're 30, you've got 35 years until retirement. If you're 40, you've got 25. But if you start investing for your kid at birth, they've got 65 years. That's 20 to 30 extra years of compounding you will never, ever get back. And yet, parents endlessly stress about how to help their kids financially. Saving for weddings, down payments, grad school, the first house.

2:17And all that is fine. But here's what none of us talk about as much as we should. $3 ,000 a year invested from birth to 18 will do more for your kid than gifting them$50 ,000 at age 30, and it's not even close. So today, we're going to walk through three different ways to invest for your kid. Three different account types, three different strategies and the real numbers behind each one. We'll talk about what happens if you fund it until they're 18, what happens if they keep contributing after that, and most importantly, the tax implications of each approach. We'll cover the UGMA, the account that requires no earned income.

3:04We'll cover the custodial Roth IRA, the account that requires your kid to have a job but gives you 100 % tax-free growth forever. And we'll cover a strategy that for some reason nobody talks about, just investing in your own taxable brokerage account and letting them inherit it with a step up in basis, completely tax-free, while you maintain control the entire time. And then finally, we'll wrap up and talk about why I'm not 100 % sold on the 529, the account everyone recommends, but that might not actually be the best option for many families. And before we jump in, a familiar ask. If this show has been even remotely helpful to you over the past few weeks or months, if it's made you feel even one ounce more confident in your financial decisions, Please consider leaving a review on Apple Podcasts or Spotify.

4:01It helps other people find the show, and frankly, it helps me feel like I'm contributing something useful to the world instead of just adding to the global oversupply of mediocre content. And to the 2 ,000 of you who left a review in the first year of this show, I cannot tell you how much I appreciate you. All right, let's get started. Part 1, the three strategies we could use. Section 1A. Bear with me. The UGMA, UTMA. This is the No Earned Income Required Account. Let's start with the UGMA, which stands for Uniform Gifts to Minors Act. There's also the UTMA, Uniform Transfers to Minors Act, which is basically the same thing with slightly broader rules depending on your state.

4:53But for simplicity, I'm just going to call it a UGMA. And if you live in one of the states that uses UTMA, congratulations, you get to transfer your kid a slightly wider range of assets. I'm sure you're thrilled. Here's what a UGMA actually is. It's a custodial brokerage account set up for minors. You open it in your kid's name, you control it until they turn 18 or 21, depending on your state, and then it becomes theirs. Fully theirs. Meaning they can do whatever they want with it, including, and I say this with love, potentially making terrible decisions. But we're going to get to that later.

5:33Here's why it's useful. The UGMA is the most flexible account that I'm going to talk about today. Your kid doesn't need a job. They don't need earned income. They don't need to do anything except exist. You can open this account the day they're born and start contributing immediately. No contribution limits. You could put in$3 ,000 a year,$10 ,000 a year,$50 ,000 a year if you want, though at some point, gift tax rules will kick in and we'll also get to that. And you can invest in anything. Stocks, bonds, ETFs, mutual funds, whatever you want. This is the account for parents who want to start early, who want flexibility, and whose kid doesn't have a W-2 from their little lemonade stand.

6:23Here are some real numbers to consider. Let's say you contribute$3 ,000 a year from the time your kid is five years old until they turn 18. That's 14 years of contributions. Total amount you've invested,$42 ,000. Now, let's assume you invest that money in a growth fund like Vanguard's Growth ETF, which has historically returned about 11 % over the long term. Obviously, past performance does not guarantee future results, but for the sake of the example, we'll use 11%. By the time your kid turns 65, so 60 years after you started, that$42 ,000 is projected to grow to$7.3 million. Let me say that again for those of you in the back.

7:18You contribute$42 ,000, they end up with $7.3 million. That's the power of starting early and letting compounding do the work for six decades. Now, let's say your kid decides to keep contributing after they take control of the account at 18. Maybe they contribute another$3 ,000 a year from age 18 to 30, just 12 more years. That's an additional$36 ,000 they've contributed. By age 65, that extra$36 ,000 turns into another$2.4 million. So now we're looking at a total of$9.7 million by retirement. They contributed$36 ,000. You contributed$42 ,000. Total contributions,$78 ,000. Total projected value nearly$10 million.

8:14And before you ask, yes, these numbers are real. No, I'm not exaggerating. This is math, boring, reliable, compound interest math. But let's consider some tax implications. Here's where the UGMA gets a little less fun, but definitely not terrible. Because the account is in your kid's name. Investment income, meaning dividends, interest, capital gains, is technically taxed to your kid. But it's worth noting, the IRS has something called the kiddie tax, which is about as cute as it sounds, which is to say, not at all. Here's how it works in 2026. The first$1 ,350 of investment income your kid earns each year is tax-free.

9:07The next$1 ,350 is taxed at your kid's tax rate, which is usually 10 % because they're, you know, a kid. But anything above $2 ,700 is taxed at your tax rate, the parent's rate, until your kid turns 19 or 24 if they're a full-time student. After that, all investment income is taxed at their rate, which, again, is almost certainly lower than yours. Now, if you're investing in a growth fund like VUG, this isn't a huge deal, and that's why I encourage thinking about these low-cost, tax-efficient funds. VUG pays very little in dividends, maybe 0.5 % annually, so most of the growth is unrealized capital gains, which aren't taxed until you or your child sell.

10:01That's a good thing. Translation, your kid probably won't hit that$2 ,700 threshold every year unless the account is massive, and by the time they do hit it, they'll likely be old enough to be taxed at their own lower rate. So yes, there are taxes, but they're highly manageable, and compared to the growth potential, it's a very small price to pay. The biggest catch with a UGMA is that your kid gets full control of the account when they turn 18 or 21, depending on your state. And I want to be very clear about what that means. They can do whatever they want with the money. They can invest it wisely.

10:41They could use it for college. They could blow it on a Tesla, a trip to Ibiza, or a series of increasingly questionable life decisions. You have zero say in the matter. Well, you can say whatever you want, you just have no legal recourse. Now, maybe you raised a financially responsible kid who will make smart decisions. Great. But if there's even a small part of you that thinks, you know what? I'm not sure I trust my 18-year-old with 200 ,000 bucks. Then maybe the UGMA might not be your first choice. Which brings us to our next option, Section 1B, the custodial Roth IRA. This week's episode is brought to you by FACET.

11:24Here's something nobody tells you. The three years before you retire might matter more than the 30 years you spent saving for it. There are decisions sitting in that window that can either save you tens of thousands of dollars or cost you that much if you get them wrong. First, Medicare and something called IRMA. Your premiums aren't based on what you make when you retire. They're based on what you made two years prior. Big income year, sold a business, took a large bonus. Medicare finds out. We're talking your Part B premium jumping from around$200 a month to nearly$700. That's$6 ,000 extra per year because of a look-back window most people don't even know exists.

12:06Second, Roth conversions. Your early 60s are often the lowest tax period of your entire adult life. The perfect window to move IRA dollars into a Roth at a discount, but convert too aggressively and you spike your income, trigger IRMA, and get pushed into a higher bracket. Convert too little and you miss the window entirely, then get walloped by required minimum distributions at 73. Third, social security timing. Take it at 62 for a guaranteed income floor, or delay to 70 for 8 % annual increases and a larger survivor benefit. Get this one wrong, and you're living with the consequences for the rest of your life, literally.

12:46Most high earners leave serious money on the table, not because they're bad with money, but because they're reacting to life instead of planning ahead for it. So go to facet.com slash Tyler today and begin to plan strategically. FACET's team of dedicated CFP professionals will build you an actual roadmap for one flat annual membership fee, not a percentage of your assets. That's facet.com slash Tyler. FACET is an SEC registered investment advisor. This is not advice. All opinions are my own and not a guarantee of a similar outcome. I'm not a member of FACET. I have an incentive to endorse FACET as I have an ongoing fee-based contract for cash compensation as well as a percentage of equity and facet based on this endorsement.

13:36This episode is brought to you by Copilot Money. I have a group chat with four of my closest friends from my finance days. Between the five of us, we have decades of experience managing other people's money, multiple licenses, and I say this with love, a genuinely embarrassing amount of opinions about expense ratios. These are not people who download budgeting apps. These are people who tend to mock budgeting apps. Yet every single one of them uses co-pilot money, unprompted, voluntarily. One of them texted me last month just to say, and I quote, I finally feel like my financial life is in one place from a guy who used to manage eight-figure portfolios.

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15:53And I don't say that lightly because I generally try to avoid having favorite financial products the way some people have favorite children. But if I had to pick one account type that combines tax efficiency, long-term growth potential, and the ability to teach your kid about money, it's the custodial Roth IRA. Here's what it is. It's a Roth IRA in your kid's name, controlled by you as the custodian until they turn 18. After that, it becomes theirs, just like a regular Roth IRA. Contributions are made with after-tax dollars, and all future growth and withdrawals in retirement are 100 % tax-free.

16:35The catch? Your kid needs earned income. But here's why it's useful. The custodial Roth IRA has this massive advantage over every other account we're talking about today. Tax-free growth forever. I'll repeat it because it's worth repeating. Every dollar of growth, every dividend, every capital gain, every bit of compound interest, over 50, 60, or 70 years comes out completely tax-free in retirement. And when we're talking about a time horizon of this magnitude, that's insanity. Let's say you contribute$27 ,000 over nine years, and it grows to$3.6 million by the time your kid is 65. Well,$3.57 million in gains is yours, well, theirs, free and clear.

17:27The IRS never touches it. Compare that to a taxable account where you're paying taxes on dividends and capital gains along the way, or a traditional IRA where you'll pay ordinary income taxes on every dollar you withdraw. The Roth is the only account that says pay taxes once, upfront, and never again. And here's the other thing that too many people get confused by. You can withdraw your contributions anytime penalty and tax-free. So let's say you contribute $7 ,000 a year for 10 years. That's$70 ,000 in contributions. If your kid needs money for an emergency, they can pull out that$70 ,000 without paying taxes or penalties.

18:14Now the gains stay locked until 59 and a half, but the contributions are always accessible. Now, do I recommend doing this? Of course not, because the whole point is to let that money compound for decades. But it is nice to know the option exists if life goes sideways. Let's look at the numbers here. Let's say your kid starts working for you at age 10. Maybe they help with your business, social media posts, filing, data entry, light administrative work, and you pay them$3 ,000 a year. Because they earned$3 ,000, they can contribute up to$3 ,000 to a Roth IRA. And you, being a generous and forward-thinking parent, decide to fund that contribution for them.

19:00You do this from 10 to 18. That's nine years of contributions. Total amount you contribute, 27 ,000 bucks. Now, let's say you invest that money in VUG at 11 % average annual growth, and you let it sit untouched until they're 65. By age 65, that$27 ,000 has grown into$3.6 million. And remember, that entire$3.6 million is 100 % tax-free. No taxes on the growth. No taxes on the withdrawals. Zero. And even better, let's say your kid gets a real job at 18, part-time, full-time, doesn't matter, and decides to keep contributing to their Roth IRA. In 2026, the contribution limit is$7 ,500 a year or 100 % of their earned income, whichever is lower.

19:52Let's say they contribute the max of$7 ,500 a year from just ages 18 to 30, just 12 more years. That's an additional$90 ,000 they've contributed. By age 65, that extra$90 ,000 turns into another $3.6 million. So now we're looking at a total of$7.2 million by retirement. All of it, every single dollar tax-free. They contributed$90K. You contributed$27K. Total contributions$117 ,000. Total value,$7.2 million. Total tax bill, zero. If that doesn't get you excited about the Roth IRA, I don't know what will. And in case you didn't hear me the first few times, here are the tax implications. None. No taxes on contributions as they're after tax, no taxes on growth, no taxes on withdrawals in retirement.

20:48The only tax you're paying is the fact you don't get a deduction today. But here's the thing, your 10-year-old isn't in a high tax bracket to begin with. If they're earning$3 ,000 a year, they're probably paying 0 or 10 % in federal taxes anyway. So the cost of not getting a deduction today is basically nothing. And in exchange for that, they get decades of tax-free compounding. It is the best deal in the tax code. The catch. The catch is that your kid needs earned income. And not just, hey, my dad gave me 20 bucks to take out the trash income. Legitimate, documentable, defensible income. If you're paying your kid to work for your business, that's fine, but it needs to be real work, age-appropriate, safe, reasonably compensated, and you need to keep records, timesheets, pay stubs, job descriptions, the whole thing.

21:46And know this now. The IRS will audit you if you're paying your eight-year-old $15 ,000 a year to consult. So keep it reasonable. 10 to 15 bucks an hour for legitimate tasks like social media help, filing, admin work, cleaning, organizing, that's all defensible. And if your kid is older, 12, 14, 16, they can earn money through babysitting, lawn mowing, dog walking, lifeguarding, whatever. As long as they're getting paid and can document it, they can contribute to a Roth IRA. The other catch, same as the UGMA, once they turn 18, the account becomes theirs. They control it, and while they can't withdraw the gains without penalties until 59 and a half, they can withdraw their contributions anytime.

22:37So if you contributed $27 ,000 over nine years, they could, in theory, pull that$27 ,000 out at age 18 and buy a very nicely used sports car. I don't recommend this, neither should you, but it's technically possible. That said, if you've been talking to them about money, if you've been showing them the account balance, if you've been explaining the power of compounding, there's a decent chance they'll leave it alone and let it keep growing. And honestly, if they do pull it out at 18, you've still taught them a valuable lesson about consequences and opportunity cost, just a very expensive one. And finally, section 1c, your own taxable brokerage.

23:20The you keep control plus step up basis strategy. All right, now let's talk about the strategy that nobody ever mentions, even though it might actually be the smartest option for a lot of parents, just investing the money in your own name. I know, revolutionary. But hear me out, because this strategy has one massive advantage that the UGMA and custodial Roth don't. You keep control of the money until you die. And when you die, your kid inherits it with something called a step-up basis, which means they pay zero capital gains taxes on all those decades of growth. So let me explain how this works, because it's genuinely one of the best tax loopholes in the U.S.

24:03tax code, and so few people take advantage of this in practice. First, this isn't some special account. It's just your regular taxable brokerage account. You open it at Fidelity, Schwab, Vanguard, wherever you already have accounts, and you invest your money in your own name. Many of you probably already do this. And if you earmark some of those assets for your kid, you gain some advantages throughout your life. You control it. You decide when to sell it. You decide what to invest in. You decide whether to use the money yourself if you need it before you die. But when you die, if you have assets left over, your kid can inherit it.

24:43Here's where it gets interesting. When someone inherits a taxable brokerage account, not to be confused with a 401k or traditional IRA, which have their own rules that are beyond the scope of this episode, the cost basis, meaning the original purchase price of all of your stocks, gets stepped up to the market value on the date of your death. Let me give you an example. Let's say you buy$10 ,000 worth of VUG when your kid is born. Over 50 years, that$10 ,000 grows to a million. You die. Your kid inherits it. Normally, if you had sold that investment while you were alive, you'd owe capital gains taxes on$990 ,000 of gain.

25:25At a 20 % long-term cap gains rate, that would be$198 ,000 in taxes. But because your kid inherits it, the cost basis resets to a million dollars, as if they just paid a million dollars for the same assets. So when they sell it, they owe zero taxes on that$990 ,000 gain. It's like the IRS just erased all the capital gains that accumulated during your entire lifetime. And yeah, this is completely legal. It's not a loophole in the we're exploiting a technicality sense. It's literally how the tax code is written. This episode is brought to you by Element, which, and I say this as someone who has recommended index funds for over 15 years, might be the best value proposition I have ever encountered.

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27:42My favorite flavor is mango chili, my friends are now converts, and the samples are gone, which means it's time for me to go back to Vermont, and it's time for you to go to drinkelement.com slash Tyler. That's drinkelement.com slash Tyler to receive a free sample pack with any purchase. And trust me on the mango chili. The biggest advantage with this strategy is control. Because with the UGMA or custodial Roth, your kid gets full control at 18 or age of majority. Maybe they make smart decisions, maybe they don't, but either way, it would be out of your hands. With this strategy, you keep the money in your name, you decide what happens to it, and if your kid turns 18 and starts making that series of questionable life decisions, you still have the option to hold on to the money until they hopefully mature a bit.

28:37Or you never have to tell them you're doing this for them in the first place. The second advantage of this strategy is flexibility. Let's say you contribute $3 ,000 a year for your kid, but then, you know, life happens. You lose your job, you have a medical emergency, you need the money. If it's in a UGMA or custodial Roth, you can't touch it. It's not your money, even if you technically control it. But if it's in your brokerage account, you can sell it, use it, do whatever you need to do. It's your money until you die. And the third advantage, and again, this is the one most people forget about, is that your kid inherits it 100 % tax-free because of the step-up basis.

29:22Let's look at the numbers. Let's say you have your first kid at age 30. You decide to invest$3 ,000 a year in your own taxable brokerage account invested in VUG from the day they're born until the day you die. Let's assume you live to 80. That's 50 years of contributions. Total amount you've invested,$150 ,000. Now, let's assume VUG returns 11 % annually over those 50 years. By the time you die at age 80, that account is worth$5.6 million. Your kid inherits it at age 50. Because of the step up in basis, they inherit that entire$5.6 million tax-free. No cap gains taxes, no income taxes, nothing.

30:06They can sell it the next day, take the cash, and owe zero taxes on$5.45 million in gains that accumulated over your lifetime. Now, let's say your kid doesn't need the money right away. They inherit it at 50, and they let it keep growing for another 15 years until they're 65. If it continues growing at 11 % annually, that$5.6 million turns into$28 million by the time they're 65. Now, the growth after they inherit it, the$22.4 million, is taxable when they sell, but the original$5.6 million they inherited, still tax-free, still reflects their reset cost basis. So even if they owe 20 % cap gains on the$22.4 million in post-inheritance gains, that's about$4.5 million in taxes.

30:58They're still walking away with$23.5 million net. Not bad for a$150 ,000 investment. Here's one quick tax implication to consider. While you're alive, because it's in your taxable brokerage account, you do pay taxes on the dividends and realized capital gains. Again, this is why the good news of something like VUG is that it pays very little in dividends, maybe 0.5 % a year. So you're not paying much in taxes each year. And as long as you don't sell, you don't owe any taxes on the unrealized capital gains. That's the strategy. So yes, you're paying some taxes along the way, but it's minimal. and it's a small price to pay for the flexibility and control you get in return.