Opening a savings account for your child will give them a safe place to keep their money, allow them to earn some interest on their funds, and teach them about banking and money management at the same time.
When setting up an account for a child, parents can choose between a custodial account or a child-friendly savings account. Many financial institutions offer both options, making it relatively easy to find the right financial institution for your family.
Types of bank accounts for children
The main difference between managed accounts and child savings accounts is how the two types of accounts are structured.
Custodial account
A parental account is an account that a parent can set up and manage on behalf of their minor child, who can then take over the account once they become a legal adult. Once a custodial account is established, any adult can contribute to it. Additionally, once funds are deposited into your account, they cannot be withdrawn. There are two types of custodial accounts, the main difference being the types of assets they can hold.
- Uniform Gifts to Minors Act (UGMA) Account: UGMA accounts can hold financial assets such as cash, securities, pensions, and insurance policies. These accounts can be opened in all 50 states.
- Uniform Transfers to Minors Act (UTMA) Account: UTMA accounts are more flexible than UGMA accounts in that they can hold any type of asset, tangible or intangible, such as real estate, art, royalties, patents, and more. Transfers to these accounts are also permitted by inheritance. These accounts can be opened in all states except South Carolina and Vermont.
Unlike savings accounts, custodial accounts can store more than just cash. Because they can include investments, they can provide greater long-term returns than savings accounts. The disadvantage of a custodial account is that the assets are owned by a minor, which can affect that child’s ability to receive federal financial aid for college.
Both brick-and-mortar banks and online-only banks offer UGMA or UTMA accounts, but the annual percentage yield (APY) can be significantly higher with online banks.
savings account for children
An alternative to custodial accounts is savings accounts designed for children under 18, where shared ownership exists between parents and children. The best savings accounts for kids may come with perks like apps with educational content and parental controls, birthday gifts for kids, and debit cards for teenagers.
Look for a kids savings account with no maintenance fees, no minimum balance requirements, and a relatively high annual percentage yield (APY).
What happens when a child turns 18 depends on the bank. The account may be converted to an adult savings account or may remain jointly held until the owner decides to change.
Opening a savings account for your child has many benefits, including:
- Help students plan ahead and stay focused on their goals and priorities.
- Teach them to save money until they can afford the things they want.
- It shows how money grows thanks to compound interest.
- Give your children hands-on experience with online banking and in-branch banking.
Learning financial responsibility takes time, so don’t give your child more than they can handle. Because a joint savings account gives your child access to the money, some parents may want to choose an account that offers parental controls.
How to open a savings account for your child
In some ways, opening a savings account for a child is very similar to opening a savings account for an adult. Here are some tips to consider when purchasing a savings account for your child.
1. Open a savings account instead of a checking account
Checking accounts are for spending money, but you’re probably trying to teach your kids how to save money. We recommend waiting until your son or daughter is a teenager or has a job before giving them full access to your checking account.
During the account opening process, you may be required to provide your child’s identification, such as a social security card or birth certificate.
2. Branch and online banking
With your help, your child can sign on to the bank’s website or use an app to learn about managing their account from their smartphone or computer. You can check your account balance, transaction history, and interest earned.
Your child may be tech-savvy enough to perform basic banking online, but they may also benefit from learning proper banking etiquette at a brick-and-mortar branch. When children receive money for a birthday or a chore, they may enjoy visiting a branch, handing the money to a teller, and receiving a paper deposit receipt.
3. Look for banks that promote financial education
Some banks make saving fun and teach kids good money habits through services like mobile app features, online tutorials, and birthday bonuses. Ask your banker or check your bank’s website to see what resources it offers for young people.
The website of the Consumer Financial Protection Bureau, a financial regulatory and education agency, is also a great place to find information on teaching your children about money issues.
Best banks for children’s accounts
Bank accounts for children are available at many large and small banks and credit unions, including:
- Alliant Credit Union
- bank of america
- Bethpage Federal Credit Union
- capital one
- golden 1 credit union
- USALLIANCE Federal Credit Union
- wells fargo
The best bank accounts for kids usually come with valuable features and benefits for kids and parents.
4. Find the highest yield
Search for high-yield savings accounts. Credit unions and online-only banks typically offer the best interest rates, but don’t shop just for interest rates. Accounts with the highest rates may not have other features you need.
5. Avoid account fees and ask about features
Some banks and credit unions waive monthly fees and minimum balance requirements for accounts for minor children. Ask about account benefits and features, such as online tutorials and parental controls.
6. Don’t forget to save up for college
Most parents cannot afford to wait to save money on their child’s education. According to the College Board, the average cost to send a child to a public four-year institution in the state is $11,260 per school year. For a private, nonprofit, four-year school, it’s $41,540.
There are many ways to save for unexpected expenses. You’ll need to decide which one is best for your family’s goals and circumstances.
- 529 account: Most parents save for college in a 529 plan. This allows you to diversify your after-tax funds into low-cost stock and bond funds and withdraw them tax-free for qualified education expenses.
- UGMA/UTMA Account: UGMA and UTMA accounts are custodial accounts that allow parents, grandparents, etc. to transfer assets to their minor children. Assets are managed until the child reaches adulthood. Custodial accounts are considered assets and have tax implications. If you think your child may someday need financial aid to attend college, keep an eye on these accounts. Custodial accounts may result in student disqualification or reduced eligibility.
- Education Savings Account (ESA): Also known as “Coverdell ESAs,” these accounts receive no special tax treatment from the state, but federal taxes are deferred. The IRS does not tax withdrawals as long as they are used for qualified education expenses. ESAs have little impact on financial aid eligibility, even if the student owns an account.
Whatever your child’s financial goals, make learning about money fun. The rewards will be well rewarded for both of you.
Frequently asked questions about children’s savings accounts
conclusion
It’s never too early to start your child on the savings journey. A child-friendly savings account can go a long way in establishing good money-saving habits.
Not only is it a safe place to store money and earn a little interest, it’s also proven to be helpful in teaching kids about money management and saving towards their financial goals.
–Freelance writer Kevin Payne Contributed to updating this article.
