529, Roth IRA or Brokerage Account for Kids?

Q. Between 529, Roth IRA, a brokerage account, or custodial account, which is best?

A. Simple answer:  529 Plan also know as Qualified Tuition Plan.  It's the best tax advantages.  One drawback is that there can be a 10% penalty on earnings if the child decides not to go to college or trade school.  But the penalty can be avoided by naming another family member as beneficiary.  If the kid goes to school on scholarship, and doesn't need the 529 money,  the penalty (but not the tax) is waived.

There is no federal deduction for making a contribution to a 529 plan. Most states, including IL,  allow a deduction on the state return.

Q. Which one will provide the greatest return on investment? 

A. Although a 529 plan does give as many options as brokerage account, most of them have enough flexibility to give near the same returns as brokerage accounts.

As child must have earned income to open an IRA.  When used for education, the 10% penalty is waived, but tax is still due if the withdrawal is before age 59.5. 

"Also, should I open all three types of accounts for them and place 1/3 of the funds in each account?"

Your child can not have a Roth IRA in their name unless they have compensation earned from working.

With a qualified tuition plan, you can withdraw the earnings tax free if used for higher education.  You may get a state income tax deduction on contributions although you won't get a tax deduction from the federal government on contributions.

With a brokerage account, you need to start by learning the difference between putting the funds in the child's name (a bad idea) or a custodial account (better), and you need to understand that annual earnings will be taxed at your income tax rate, this is called the "kiddie tax" and it prevents you from putting money in a child's name and paying lower income tax rates because they have less total income than their parents. 

https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids

https://www.irs.gov/taxtopics/tc553

With a brokerage account, the child is guaranteed to pay income tax when they withdraw the money, at capital gains tax rates which are currently lower than ordinary income (but might not stay that way).  With a QTP, qualified withdrawals are tax-free, while non-qualified withdrawals will be taxed as ordinary income (higher than capital gains rates) and may be subject to an additional penalty.

Whether to open a custodial investment account or a QTP depends on how much flexibility you want 18 years from now, and whether you want to pay some tax guaranteed, or maybe no tax or maybe higher taxes.   You could also hedge your bets and do both.

But no IRA.