Set your little ones up for financial success with a kids’ savings account.
It’s never too early to start saving. In fact, recent studies indicate that children from low- and moderate-income families are far more likely to attend and graduate college if they have savings accounts, even if the account holds less than $500.
You can give your kids a head start on a bright financial future by teaching them the benefits of saving early on. Kids’ savings accounts offer a number of features that make them ideal for young people looking to put away money for a rainy day. They encourage your child to save a certain amount each month and can help them achieve short- and long-term financial goals.
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Some of the best children’s savings accounts
Compare the potential interest earned with the following savings accounts. We take a look at how much interest an account earns over 12 months with an initial deposit of $5,000.
|Savings account||Interest rate||Interest earned over 12 months|
|Justice Federal Credit Union Grow With Me Account||4.47% APY||$228.56|
|Alliant Credit Union Kids Savings Account||2.1% APY||$106.09|
|Northpointe Bank Kid’s Savings Account||1.50% APY||$75.56|
|Capital One Kids Savings Account||1% APY||$50.25|
Compare with regular savings accounts
How does a savings account work for my child or grandchild?
Kids’ savings accounts usually have higher interest rates than adult savings accounts and savings bonds, but they may have more withdrawal restrictions depending on the type of account. Age restrictions also apply, and to be eligible, you usually need to be under the age of 18.
Joint savings accounts vs. custodial savings accounts
Since minors can’t legally sign contracts, they won’t be able to open a savings account under their own name. This leaves two options: joint and custodial savings accounts. The type of account you open for your child will affect restrictions, taxes, withdrawals and other factors. Here’s how they differ:
- Joint savings accounts. If minors want access to their savings account, banks will require a parent or guardian to be listed as a joint owner. This generally offers equal access to the account, but actual terms and restrictions may vary depending on the state and institution. For example, some banks will prevent children under the age of 13 from making withdrawals without the co-owner’s signature.
- Custodial savings accounts. If minors don’t need access to their money, the other option is to open a custodial account, which is managed by a parent or guardian. The money in the account belongs to the minor, but they won’t be able to withdraw until the account switches to a sole account once the minor reaches the age of majority — 18 in most states. The custodian is allowed to make deposits into the account, but won’t be able to withdraw from it unless the funds are used exclusively for the minor’s benefit.
Making deposits into children’s savings accounts
The type of savings account you open can affect the way deposits are made. Depending on the purpose of the savings account, there are a few options you may want to explore:
- Joint accounts. Joint accounts operate just like any standard savings account. Either owner will be able to make deposits into the account, and either party will be able to withdraw, although there may be restrictions depending on the age of the minor.
- Uniform Transfers to Minors Act (UTMA) accounts. A UTMA account is a type of custodial savings account that is owned by the minor but managed by the custodian. This allows the custodian to make irrevocable deposits of nearly any type of asset into the account.
- Uniform Gift to Minors Act (UGMA) accounts. A UGMA account is another type of custodial account that is very similar to a UTMA account but only allows custodians to make deposits in the form of bank deposits, stocks, bonds, mutual funds, other securities and insurance policies.
Tax implications of children’s savings accounts
Children’s savings accounts are a great way to teach kids about the importance of saving and can help them work toward short- and long-term financial goals. While there are a number of ways you can make deposits, children’s savings accounts are not a way to avoid paying taxes. Tax rates and rules can differ between states, banks and accounts, so check with your institution to ensure you’re wholly informed.
The kiddie tax is designed to discourage parents from shifting investments to their children to avoid paying taxes. It applies to all children under the age of 18 or students under the age of 23 whose unearned income — including interest, investments and gifts — exceeds $2,100. The first $1,050 is tax-free, whereas the second $1,050 will be taxed at the child’s rate of just 10%. Any amount of unearned income above $2,100 will be taxed at the same rate as income in a trust.
Individuals can gift up to $15,000 per year — or $30,000 for married couples — without gift tax implications. For amounts above this limit, a gift tax return must be filed. However, every individual has a lifetime estate and gift tax exemption amount of $5.6 million — or $11.2 million for married couples. This means that even if you exceed the annual gift limit, you may not owe any taxes.
How do I compare savings accounts for my children or grandchildren?
When deciding on which savings account to choose for your child, here are some factors to consider:
You may want to shop around for accounts with higher interest rates before making a decision. Some banks also offer promotional rates and other incentives, so it’s worth seeing what’s out there.
How deposits are made
Check to see if your child has a school banking program in place, which would allow your child to make deposits while at school. If not, you can always open an account for your child and take them to the bank once a month to show them how to physically deposit their pocket money.
There may not be any account maintenance fees for a kids’ savings account, but you should pay attention to any monthly withdrawal limits or fees.
Minimum opening deposit
Some kids’ savings accounts come with a minimum opening deposit — usually around $25 — so compare your options if you’re looking for an account that doesn’t have this requirement.
Special educational programs
Some banks have programs that give children access to online educational portals, and some even provide rewards such as a $5 starter deposit and stationery to help children learn about saving and finances.
What are the benefits of opening a savings account for my kids?
- Your kids can learn how to budget. Learning to budget is not just about teaching your kids to put their money away, but it also includes teaching them about spending needs and savings goals.
- You can teach them about the economy. A children’s savings account will teach your kids about interest rates, inflation and how world events can impact their ability to save.
- You’ll set your kids up for financial success. Research shows that kids who have any type of savings account are more likely to both go to college and graduate. These same children are also more likely to invest in stocks as adults.
What are the pros and cons of children’s savings accounts?
- Better interest rates compared to savings accounts for adults. By making small deposits each month, a child’s savings account could earn a decent amount in interest.
- There are usually no fees or charges. Many banks will make it easy on kids to save by not subjecting them to extra fees or charges when accessing the account.
- You can even open one for your baby. You can open a savings account for your baby as soon as you receive the birth certificate and take advantage of compound interest.
- The taxes could be quite high. Children’s savings accounts are still subject to taxes, especially if the amount exceeds the kiddie tax threshold.
- There’s an age limit. By the time children turn at least 18, they may no longer be eligible for the account. Some banks will automatically convert the account when the child ages out in order to give them more access to their own savings. If your bank doesn’t do this, you should consider allowing them to make the change themselves and find an account that rewards them for making monthly deposits.
Are there any traps to avoid?
Parents won’t have to worry about their child losing money with a savings account, as deposits of $250,000 or less are guaranteed if the bank is FDIC-insured. However, you should consider other risks that may come from managing a child’s savings account. For example, if you want to save your own money in your child’s savings account, even if it’s intended to purchase something for your child, there may be tax implications.
- These accounts are designed for your child only. Parents shouldn’t try to use children’s savings accounts to avoid taxes. The IRS has very strict rules governing the funds that are being held in a child’s savings account.
- Your kid has access to withdraw funds. As your child grows and is given more access to the account, they could fall into the habit of making frequent withdrawals from it. If you believe this may be an issue for your child, look for an account that limits access.
- Introductory interest rates don’t last forever. The introductory interest rate may look good, but it’s likely going to revert to an average rate after a period of time. Be sure to read the terms and conditions closely before you commit to a product.