Turning 18 is a major milestone—for your child and for you.
Almost overnight, they can begin making financial decisions that can shape their future—from college and credit to taxes and health care. As control shifts, early guidance can help them build strong habits and avoid costly missteps.
Here’s a framework to guide the conversation.
Decisions around college, work, and future income
For many families, the conversation starts with college—or the decision not to attend college.
If your child plans to go, discuss how different paths may affect their income, flexibility, and financial pressure—especially if student loans are involved. Understanding the potential return on a degree can help guide borrowing decisions.
It’s also important to align on how education will be funded. That may include family contributions, 529 plans, custodial accounts, scholarships, work income, and student loans. Understanding how each source is used—and the tax implications—can help reduce long-term costs.
This is also a good time to cover student loan basics: federal versus private loans, interest rates, repayment options, and how borrowing today may affect cash flow after graduation.
How different accounts can affect college funding
If your family has saved across multiple types of accounts, the order of withdrawals can affect taxes and aid eligibility. Custodial accounts such as UGMAs or UTMAs are considered the child’s assets, which can have a greater impact on financial aid and become fully theirs at the age of majority.
Education accounts like 529 plans and Coverdell accounts are typically treated as parent assets. Qualified withdrawals are generally tax-free, while nonqualified use may trigger taxes and penalties.
If grandparents own a 529 plan, timing and coordination are still important, even though recent rule changes have reduced the impact on financial aid.
In many cases, families start by spending down custodial assets, which are treated less favorably in financial aid formulas, then use parent-owned education accounts like 529s. Taxable accounts may help fill remaining gaps, while grandparent-owned 529 accounts often require coordination to avoid issues around timing of withdrawals.
The right approach depends on your broader financial picture, but planning ahead can help stretch education dollars further.
College withdrawal hierarchy
| Account | Taxation if qualified | Penalty if nonqualified | Student Aid Index treatment | Student Aid Index rate |
|---|---|---|---|---|
| UGMA/UTMA | Child + parent | N/A | Child-owned asset | 0.20% |
| Coverdell | None | Tax + penalty | Parent-owned asset | Up to 5.6% |
| 529 | None | Tax + penalty | Parent-owned asset | Up to 5.6% |
| Grandparent 529 | None | Tax + penalty | N/A | 0 |
| Taxable account | Income and capital gains | N/A | Parent-owned asset | Up to 5.6% |
Source: Fidelity Investments. Student Aid Index (SAI): A number calculated from your FAFSA that ranges from –1,500 to 999,999 and helps schools gauge financial need.
Custodial accounts and what happens at age 18
If your child has custodial accounts, turning 18 (or older in some states) triggers a transfer of ownership.
The account must be re-registered in your child’s name, or it may be restricted. More importantly, your child now controls the money.
This is a key moment to discuss how those funds should be used—whether for education, emergency savings, or long-term investing.
It’s also an opportunity to introduce investing basics, risk tolerance, and time horizon so they can make informed decisions about their future.
Read Viewpoints: Transferring a custodial account to the beneficiary
What happens to Roth IRAs for minors
If your child has a Roth IRA for minors, it typically needs to be transferred to a standard Roth IRA once they reach the age of majority.
The transfer doesn’t trigger taxes, but withdrawal rules still apply. Contributions can generally be withdrawn tax- and penalty-free, but pulling money out early may mean missing years of potential tax-free growth.
Families may want to weigh whether it makes sense to tap Roth dollars or rely more on student loans for education, depending on expected future income, loan terms, and long-term priorities. Looking at the decision as part of a holistic plan can help clarify the tradeoffs. For example, if a student expects higher future income and can secure relatively low-cost loans, it may make sense to preserve Roth dollars for long-term growth, while higher loan rates or a priority to avoid debt could tilt the decision toward using Roth contributions first. It’s also worth noting that withdrawals from retirement accounts during college years may affect financial aid eligibility. The Roth IRA’s 5-year aging rule is another important factor to understand early. Read Viewpoints: What to know about the Roth IRA 5-year aging rule
To learn more, read: Turbocharge your child’s retirement with a Roth IRA for Kids
Taxes: Dependent or independent?
Taxes often come as a surprise to young adults—and sometimes to parents.
Whether a child can be claimed as a dependent affects tax filing requirements, credits, and eligibility for certain benefits. To be claimed as a dependent, several tests generally need to be met, including relationship, age or student status, residency, support provided, and filing status.
Income from a job, investments, or account withdrawals can also change filing obligations. Understanding the rules ahead of time can help avoid missed credits or unexpected tax bills.
Health insurance and HSAs
Health insurance is another major decision point after age 18.
Many young adults remain on a parent’s plan until age 26. If that plan is a high-deductible health plan (also called an HSA-eligible health plan), and the child otherwise qualifies, they may be eligible to save in their own health savings account (HSA). Read Viewpoints: 6 surprising HSA benefits
HSAs offer a unique triple tax advantage1 when used for qualified medical expenses, making them a powerful long-term savings option.
- Contributions go into the account pre-tax through an employer or you can deduct the contribution on your taxes.
- Your money can be invested for growth potential, and any earnings grow without being taxed.
- Withdrawals for qualified medical expenses are tax-free.
And HSAs aren’t just for doctor visits. Some unexpected qualified medical expenses include sunscreen, red-light masks when used to treat diagnosed skin conditions, air purifiers for allergies or asthma, and blue light glasses or other prescription glasses. To learn more, read: HSA- and FSA-eligible expenses
If your child moves to their own coverage, make sure they understand plan options, costs, and whether documents like a health care proxy are needed.
Steps to building a financial foundation
Building a strong financial foundation with a methodical process can help create stability, flexibility, and long-term growth potential.
Start with the basics
Open a checking and savings account in their own name
Separating day-to-day money from parents can help reinforce independence and clarify responsibility.
Create a simple budget
Understanding cash flow is the foundation for saving and investing. A straightforward framework like Fidelity’s 60/30/10 + 15 guideline can help balance spending, near-term needs, and longer-term goals.
Save $1,000 for emergencies
Even a small cushion can prevent unexpected expenses from turning into credit card debt. Start with a goal of $1,000.
Start building credit
A starter credit card, used responsibly and paid on time, can help establish a credit history that supports future goals like renting an apartment or buying a car. To learn more, read: How to build credit at 18
If working, get the full employer match in a retirement plan
Employer matches are essentially free money—and a powerful way to jump-start long-term savings. Find out more, read: How does a 401(k) match work?
For a quick estimate on how much to save for retirement, Fidelity suggests saving about 15% of pre-tax income for retirement, including any employer match.
Grow emergency savings to 3–6 months of essential expenses
As responsibilities increase, having a stronger safety net becomes more important—especially before taking on fixed costs like rent. Read Viewpoints: How much to save for emergencies
It can be a good idea for them to invest a portion of their emergency savings in relatively conservative, liquid investments to help offset the effects of inflation. Read Viewpoints: Investing for short-term goals
These basics can help build a strong foundation. As your child’s career and income evolve, their goals may expand too—like buying a home, increasing financial security, or building retirement savings. For a fuller step-by-step framework, read Viewpoints: A step-by-step financial checklist.