What Should I Do with a $1k Gift for My Newborn Child?

A friend recently asked me this question after Grandma and Grandpa sent them some money for their newborn. They weren't sure where to start, and I get it—when it comes to your child's financial future, you want to make the best possible choice.

A lot of it boils down to what you expect from their future, but here is what we talked about:

1. Open a 529 College Savings Plan

A 529 plan is one of the smartest ways to invest that $1,000 for your child’s future education. The tax benefits alone make it worth considering—contributions grow tax-deferred, and when it’s time to pay for qualified education expenses like tuition or books, withdrawals are tax-free.

Even starting with $1,000 can help make an impact by the time your child is ready for college, especially if you continue to contribute smaller amounts over time. Plus, some states offer tax deductions or credits for contributing to a 529 (which was true for these friends, who live in Minnesota).

If your child doesn’t end up using all the money for education, you have options. You can change the beneficiary to another family member, or withdraw the funds (with a tax and penalty on earnings). New rules also allow you to roll some of the money into a Roth IRA for the child’s benefit if they don’t use all of it. It offers flexibility while giving your child a head start on their education.

2. Consider a Custodial Account (UGMA/UTMA)

Another option is setting up a custodial account, such as a UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). These accounts allow you to invest the $1,000 for your child, but the investments will have taxable dividends, interest, or capital gains. Unlike a 529 plan, the money in a custodial account doesn’t have to be used solely for education—your child can use it for anything once they reach adulthood. Think of it as a general investment account that you manage while they are a kid.

This flexibility is especially valuable when the future of college education is uncertain. Who knows what higher education will look like in 18 years or if your child will choose to attend? With a custodial account, your child could use the money for education, but they could also decide to invest it in a business, buy their first car, or even save for a home.

However, keep in mind that once your child turns 18 or 21 (depending on your state), they gain control of the account and can use the money however they choose. This means you’re trusting them to make smart decisions with the money.

Whether you want to help your child with future education costs or give them financial flexibility in adulthood, starting early will give that gift time to grow. Whatever you decide, these are both good options to take advantage of the generous gift, or future gifts from family.