Saving for your grandchildren can help minimize the financial burdens they may encounter as they mature. Whether it’s paying for college, buying a first home or providing a safety net in an uncertain job market, these funds can make a significant difference. The key is choosing the right savings vehicle that balances growth potential, tax advantages and your control over the funds.

Why you should create savings accounts for your grandchildren

Creating dedicated savings for your grandchildren serves multiple purposes beyond just financial support. It teaches valuable lessons about money management, compound interest and long-term planning while providing real financial security for their future.

Starting early maximizes the power of compound interest. A $10,000 investment earning 6 percent annually grows to almost $30,000 over 18 years. Additionally, having dedicated savings helps grandchildren avoid student debt, enables them to take advantage of opportunities, and provides a financial safety net during economic uncertainty.

Many grandparents also find that saving for grandchildren creates meaningful bonding opportunities and allows them to leave a lasting legacy that extends beyond their lifetime.

Where to store savings for grandchildren

The first step to establishing savings for your grandchildren is finding the right account to keep them in. Options vary in terms of their purpose, flexibility and potential for growth. Here are the top considerations:

1. High-yield savings accounts

High-yield savings accounts are often overlooked for grandchildren but offer advantages for flexible, accessible savings. Currently offering rates over 4 percent APY, these accounts provide competitive returns while maintaining full liquidity.

Unlike other savings vehicles, high-yield savings accounts don’t restrict how funds can be used, making them ideal for various goals beyond education. You maintain complete control over the account, and funds can be accessed immediately for emergencies or opportunities.

The main drawback is that interest earnings are taxable, and there are no special tax advantages like other education-focused accounts. However, for grandparents who value flexibility and want to help with various expenses — not just education — Bankrate’s best high-yield savings accounts offer a great starting point.

2. 529 college savings plans

These state-sponsored education savings plans can be opened by anyone for a single beneficiary. While primarily designed for higher education costs, 529 plans can also pay for K-12 tuitions up to $10,000 annually, apprenticeship programs and student loan repayments.

The money in a 529 plan grows tax-free and withdrawals for qualified education expenses are also tax-free. If funds are used for non-educational expenses, however, they will be subject to tax and a 10 percent penalty on the earnings portion.

Unlike custodial accounts, ownership of a 529 plan does not automatically transfer to the named beneficiary once they reach adulthood. You control the account even as the grandchild enters college.

Read more: How to open a 529 college savings plan.

3. Custodial accounts (UGMA/UTMA)

Custodial accounts, like Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, are ideal ways to set aside money that’s controlled by an older relative until the grandchild reaches adulthood.

UGMA accounts hold financial assets, while UTMA accounts can hold any type of property, tangible or intangible. Custodial accounts can be opened at most large banks and brokerages (here’s a step-by-step guide). The custodian who manages the account can withdraw funds for expenses benefiting the child, giving these accounts a high degree of flexibility.

The primary consideration is that ownership automatically transfers to the child at the age of majority (18-21, depending on state), at which point they can use the funds for any purpose.

4. Certificates of deposit (CDs)

Certificates of deposit can be opened at most banks and credit unions and offer a guaranteed rate of return over a specific period, ranging from a few months to several years. While they lack flexibility — early withdrawal usually incurs a penalty — they have the potential to grow at a higher rate than other low-risk savings options.

For example, investing $2,000 into a competitive one-year CD with a rate of 4.50 percent APY or more could earn you $90 by the time your terms are up. CDs could be a great option for investing in shorter-term goals for your grandchildren.

5. Series I or EE bonds

These savings bonds can be purchased directly from the U.S. Treasury through the TreasuryDirect website. Series EE bonds earn a fixed rate for 30 years (or until they’re cashed), and the Treasury guarantees they will double in value in 20 years, even if additional money needs to be added by the federal government to make that happen.

The Series I bonds are also low-risk and provide some protection against inflation by having a combined fixed rate and a variable rate that’s adjusted twice a year for inflation.

Both bonds can be cashed in by a grandchild anywhere between one year and 30 years after they’re opened, though if cashed in before five years, there’s a penalty of three months of interest.

6. Youth savings accounts

Many banks and credit unions offer savings accounts designed for children and teens, often with low or no fees and helpful tools to teach kids about finance. An adult can open a joint account with the grandchild, whether that’s the grandparent or another guardian.

Having a joint savings account gives your grandchild an opportunity to learn about banking transactions firsthand. Using online access, they can regularly monitor their savings growth. This can open up discussions about saving, interest and financial responsibility.

The potential for growth may be lower with youth savings accounts than with some other options. But you can still find some attractive rates if you shop around, with some accounts paying over 3 percent APY for smaller balances.

How to build savings for your grandkids

Building savings for your grandchildren isn’t just about stashing away money. It’s a process that requires consistency, planning and effective use of financial resources. Use practical steps to create a robust financial legacy.

1. Develop a savings plan

Start by outlining your grandchild’s potential needs and your specific financial goals. How much do you intend to save, and by what age do you hope your grandchild will start using the funds? Setting clear objectives will guide your saving strategy and keep you on track.

Consider factors like current education costs (students pay $11,610 per year on average in tuition and fees at public, in-state schools, and $30,780 for out-of-state schools), timeline until the funds are needed and your own retirement security.

2. Make regular contributions

A simple yet effective savings strategy is making consistent contributions, even if they’re a small amount. Those small amounts will build up over time and earn more as they compound.

Set up automatic transfers from your account into a grandchild’s savings account so you don’t have to remember to make regular transfers. Typically, automated savings transfers can be set up through a mobile banking app or online banking portal. You can designate a specific amount to be transferred at regular intervals, such as monthly or bi-weekly.

3. Incremental increases

As you more effectively budget and invest, consider gradually increasing your contributions over time. If you’re working, these increases could come in line with salary growth or bonuses.

4. Diversify investments

One way to grow your savings is to invest in diverse assets. The intention behind distributing investments among various opportunities is to spread your risks. A mix of different types of investments — such as stocks, bonds and mutual funds — can help protect against market volatility and provide a potential for better returns in the long run.

5. Review and adjust

Regularly review your savings strategy as your life situation changes. Maybe you land a higher-paying job and can contribute more, or your grandchild earns a scholarship, decreasing their future education costs.

Tips for saving during retirement

If you’re retired or close to it, striking a balance between saving for your grandchildren’s future and fully enjoying your retirement can be challenging. But there are still ways to save even if you’re past your working years.

• Maximize Social Security benefits: By delaying your Social Security benefits until you reach your full retirement age or even later, you can increase your monthly payouts. This increases your retirement income, freeing up more cash for enjoyment and savings.
• Review insurance policies: As you age, your insurance needs can change. Review your policies regularly to ensure you aren’t over-insured and paying for unnecessary coverage. The money saved can be directed toward a savings or custodial account.
• Leverage tax-advantaged accounts: A tax-advantaged account like a Roth IRA lets your money grow even into retirement. You can generally withdraw this money tax-free and contribute it toward your grandchild’s savings.
• Turn your passion into profit: Whether it’s baking, woodworking, gardening, writing or another interest, there’s likely a market for your hobby. You could sell craftwork through an online marketplace like Etsy or offer local classes, for example. This can not only offer an opportunity for additional income, but also add a fulfilling and enjoyable dimension to your retirement years.
• Plan your estate: Consider your grandchildren in your estate planning. You might set aside a portion of your estate to be inherited by your grandchildren, ensuring their financial wellbeing long after you’re gone.

Bottom line

Through understanding your options for storing savings and implementing strategies to grow them over time, you can ensure that you’re making the most of your financial contribution to your grandchild’s future. Foresight and planning will not only benefit grandchildren in the long run, but will also serve as an example of good savings habits that you can pass along to them.

Ready to start saving for your grandchildren? Compare Bankrate’s best savings accounts and top CD rates to find the right combination for your family’s goals.