Whether your children are still crawling around the living room floor or getting ready to head to college, there are plenty of ways you can give them one more gift as a parent. You can give them a head start on their financial future.

After all, time and compound growth are on their side—and that’s the perfect recipe for kick-starting your children on the path to a bright financial future.

Here’s a closer look at the options you have for investing in your child’s or grandchild’s future.

The Steps to Your Children’s Sunny Financial Future

Before you dive into this endeavor, there is one preliminary step to keep in mind. Make sure you’re taking care of yourself before you start investing for your children or grandchildren.

Ideally, you would have little debt, except your mortgage. And you should have an emergency fund, with enough to cover 3–6 months of expenses. Finally, you should also be putting money away on a regular basis for your own retirement, via a 401k and/or IRA account.

After all, you want to be set financially so you don’t end up depending on your children during your retirement years.

Investing for Kids

Age 11 or 12 may be the right time to start a conversation about investing, including how it’s different from saving money in a bank. Here’s one key investing principle to teach your kids.

Compounding interest lets you use money to grow money. As your assets grow, you earn interest on a bigger and bigger pool of money. To get the full benefit requires one idea to be put in practice: the more time you give your investments, the more you’re able to accelerate the return potential of your original investment.

A quick and easy way to demonstrate the power of compounding — especially to younger children — is to ask if they’d rather have a $100 bill today or a penny that doubles every day for 30 days. They will be surprised to hear that in 30 days, that penny would be worth about $5.4 million dollars!

Perhaps the biggest component to successful investing is a long time horizon for your money to grow. And obviously, kids have a lot of time on their side. Even if you allow their money to stay invested for just several years, your kids are likely to see a nice return on their initial investment.

Seeing their money grow can encourage your children to be good investors as adults by teaching them valuable lessons about money and the power of compound growth.

So whether it's your kid, a grandchild, or a friend or family member - in my case, three grand-nephews - here are the types of accounts to get kids started investing…

Education Savings Accounts (ESAs)

When you invest in an ESA, you don't have to pay taxes on investment income or capital gains that accrue inside the account, which means your money has a chance to compound faster. However, contributions aren't tax deductible.

Withdrawals are free from federal taxes as long as you use the money for qualified education expenses, such as tuition, books, supplies, uniforms, room and board, etc. Tax-free withdrawals apply not only to college expenses, but also elementary and secondary education expenses—regardless of whether the school is public or private, secular or religious.

ESAs offer access to a broader selection of investments than a typical 529 account, and don't have the 529 plans $10,000 tax-free withdrawal cap for qualified expenses to an elementary or secondary public, private, or religious school.

So an Education Savings Account is a good place to start investing for your kid. They’re simple and similar to an IRA, but there are a couple limitations. 

First, the maximum you can invest in an ESA is $2,000 a year per child. Second, married couples making more than $220,000 a year and single parents bringing in more than $110,000 a year can’t make contributions to an ESA.

But what if you want to invest beyond the $2,000 limit, or if your income exceeds the ESA income limits?

529 Accounts

If specifically saving for a child’s education is the goal, a 529 account is a great way to go. It is tax-advantaged for education expenses. Investments grow tax-free and can be withdrawn for qualified expenses such as textbooks, tuition, and room and board.

And thanks to a major update from the SECURE 2.0 Act, the 529 plan is now more appealing. As long as you meet certain requirements, you can roll over any unused money from a 529 into a Roth IRA for the plan’s beneficiary, and you won’t have to pay income taxes or penalties on the rollover. That’s great news if you’re worried about putting more into a 529 than your child will end up needing for college.

Thinking Even Further Ahead

Maybe you’re thinking about investing for your children that is further into the future than college. After all, your children will go through a lot of important—and expensive—events and life milestones in their 20s and 30s.

If you want to invest money to help your child cover the cost of a wedding or a down payment on their first home, you’ll want to put that money into an account that’s more accessible than a Roth IRA.

These accounts won’t have the time—or tax breaks—to grow like a Roth account, but your kids will be able to use the money penalty-free when they need it for major life events. Here are the accounts…

Custodial Brokerage Accounts

These are the accounts I have for my grand-nephews. After all, they may decide college is not for them.

Under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA), you can open up custodial accounts for minors. Although the account will initially be in your name as custodian for the child, the child will automatically take complete control of the account once they reach age 18 or 21, depending on state laws.

There are some advantages to using these accounts. Since they’re in the child’s name, the accounts will be taxed according to their tax bracket. The lower tax rate for children means they’ll pay less in income taxes. And there are no contribution limits on UGMA and UTMA accounts.

There are also two account types for older children.

Roth IRAs

If your children are older and have earned income from a part-time job, you can help them open a custodial IRA. A Roth IRA, in particular, is ideal for children: Your child's contributions to the account will grow tax-free. Those contributions can be pulled out at any time, and the investment growth portion of the account can be used for particular purposes, such as a first-home purchase or higher education expenses.

Trading Accounts

If your teenager asks about stock trading, some brokerage firms are creating new account types explicitly geared for teens who want to learn to trade investments. Fidelity, for example, offers a Youth Account. It lets teens, aged 13 to 17, control the account, while letting parents monitor account activity, trades, and transactions, via alerts.

A Parting Thought

No matter how you plan on investing for your children’s future, it’s important to sit down with your kids when they’re old enough and talk to them. Clear communication about the expectations for the money can save you from dealing with family drama around the dinner table during Thanksgiving.

Giving an immature high school or college grad access to thousands of dollars is like handing over the keys to a Ferrari to someone who just passed their driver’s test yesterday.

So, talk to your children.