How do I make a kids' name puzzle where the letters lift out of a pocket?

Why the pieces do not fit by default

A round bit cannot cut a sharp inside corner in the pocket, but it leaves a sharp outside corner on the letter. Cut both from the same vector and the letter is the same size as the hole with corners that collide. A puzzle needs two things: matching corner radii and a deliberate gap.

Steps

1. Font and size. Pick a bold font with no thin strokes, and convert the text to curves. Keep letters large enough that the bit fits inside every counter.
2. Use the Inlay Toolpath. Choose Pocket for the base and Straight for the letters. It rounds the letter corners to match what the tool leaves in the pocket. The official documentation is clear that you must use the same tool for both parts.
3. Set the gap. The Allowance fields overcut the shape, shrinking the letter and enlarging the pocket. The official documentation suggests 0.01 or 0.02 inch when no finish is applied. Makers chasing a tight decorative inlay use far less, around 0.002 to 0.003 inch on the pocket. For a toddler puzzle one published build used about 0.025 inch so pieces drop in and lift out freely. These numbers disagree because the goals differ: a puzzle should be loose, and paint adds thickness.
4. Depths. Make the pocket shallower than the letter stock so the pieces stand proud enough for small fingers to grab. Measure your letter stock and decide the reveal from that.
5. Finger access. If the letters sit nearly flush, add a small pocketed scoop beside each letter or a through hole behind it so a finger can push the piece out.
6. Order. Pocket the base, then profile the base outline. Cut the letters from the second board with tabs or tape.

Pro tips

• Cut one letter and one pocket in scrap, then paint the test letter before judging the fit.
• Paint only the top face of the letters. A reversible letter such as an O or an H then cannot be put in upside down and jam.
• See the entry on the Inlay Toolpath for stepped and through-hole options.