A kids’ savings account is designed for kids under age 18: The child and a parent or guardian act as joint account holders. Unlike regular savings accounts, children’s savings accounts often come with additional perks such as:
- No monthly account fees
- Low to no opening balance requirements
- Online learning tools to boost a child’s financial education
- Mobile apps so kids can easily view their accounts
Remember that perks vary by bank, so it pays to ask about the specific kid-centric features offered.
Should You Choose a Kids’ Savings Account or a Custodial Account?
There are typically two types of accounts you can open for your child: a savings account or a custodial account, and the difference is important. If you open a savings account, you and your child will have joint ownership of the account, and your child will be able to access the funds (with you, the parent, being able to monitor account activity).
If you open a custodial account, also referred to as a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, money in the account is treated as a gifted asset your child fully owns; funds cannot be accessed until the child turns 18. Yet using this type of account may complicate your taxes. So unless you have a particular reason for choosing a custodial account, you may want to go with a typical savings account.
What Are Your Goals for Your Child’s Savings Account?
Why do you want your child to have a savings account? There are several good reasons.
- To help your kids learn more about money and finance. Having a savings account can help your child learn about compound interest, different financial accounts and managing money in everyday life.
- To help your children learn more about banking. Your child can learn how to deposit checks, bank online, withdraw cash at a brick-and-mortar bank and more.
- To help your kids develop the habit of saving money earned from an allowance, chores or part-time job. If you are trying to teach your child how to manage their money, save a percentage of their income or use funds for different financial goals, a savings account can make these concepts seem more real in your kid’s mind.
- To save money for a specific short-term financial goal. For example, if your child wants to buy a new video game console or save money for summer camp or a special purchase, they could use their savings account to set aside funds for these specific goals.
Having their own savings account can help your child learn how to set financial goals and make responsible decisions about how to use money. Talk with your child about their savings account before choosing a bank or credit union. Make sure your child is old enough to understand and be curious about saving money.
Ask what questions they have, and use that conversation to guide your search. Having a real savings account of their own can help your child feel special and grown-up. You may even inspire them to learn more about finance and develop better financial habits at a young age.
Should You Use a Kid’s Savings Account to Save for College?
If you want to save for your kids’ college education, a savings account is probably not the best financial vehicle for that goal. Set up a 529 savings plan instead. A children’s savings account typically pays low interest, making it better for short-term savings and smaller amounts.
A 529 plan can help you save for college more aggressively, with a broader range of long-term investment options. Depending on your state, putting money into a 529 plan also may help you get a deduction on your state income taxes.
What Interest Rate Can You Get on a Children’s Savings Account?
The Covid-19 crisis caused the Federal Reserve to cut interest rates to near zero, and while rates are now rising, high APYs are still hard to find—children’s savings accounts included. Some of the highest-yield kids’ savings accounts include:
- Alliant Credit Union Kids Savings Account: 1.05% APY
- Capital One Kids Savings Account: 0.30% APY
- First Internet Bank Tomorrow’s Tycoon Account: 0.25% APY
These are some of the highest APY rates on children’s savings accounts available from banks and credit unions as of July 13, 2022. However, if you’re interested in a particular credit union’s kids’ savings account, remember that you’ll have to meet the membership requirements to open an account.
Other national banks, including Wells Fargo and Bank of America, offer children’s savings accounts, but the APY rates remain low. Don’t expect to get a high-yield account for your child’s savings. The primary goal of a child’s savings account isn’t to build wealth or generate a substantial return on investment. Rather, it’s to teach kids about money and provide a safe place for your child to watch their savings grow.
What Features Should You Look for in a Kids’ Savings Account?
Along with a decent APY, the best children’s savings accounts offer unique features that help make saving fun for kids. For example:
- Automatic savings plans. Banks may offer an automatic savings deposit plan that lets you transfer a certain amount of money into a child’s account each month.
- Financial education. Some banks offer interactive apps and websites with financial literacy tools that help kids learn about money. For example, Bank of America’s Better Money Habits website helps parents and kids boost their financial knowledge.
- Mobile apps/online banking. Not all banking apps have the same features, but most let you deposit checks and move money between accounts. When choosing a savings account for your kid, be sure to find out what features the bank’s app has—or doesn’t have.
- Savings goals. The Capital One Kids Savings Account lets you create multiple accounts and track different savings goals. For example, you could help your child set up separate accounts for summer camp, an Xbox or a new bike.
- ATM card. Some banks offer ATM cards your child can use to withdraw cash directly from their savings accounts at ATMs.
- FDIC insurance. Your child’s savings account should be FDIC insured, just like any other bank account. Double-check the bank website to ensure it’s an FDIC-insured institution.
These are just a few features of kids’ savings accounts that you may want to look for or ask about. Keep in mind that some banks have more offerings than others.
What Are the Fees and Requirements of a Children’s Savings Account?
Kids’ savings accounts tend to be reasonably simple, but some banks charge a few fees or have different requirements, including the following:
- Minimum opening deposit. Some kids’ savings accounts require low minimum opening deposits of $25 or less. Others require $100 or more. Be prepared to help your child save up if needed.
- Minimum daily balance. Pay attention to the minimum daily balance requirements. Many children’s savings accounts don’t require your child to keep any money in the account, but some might require a minimum daily balance to avoid a fee.
- Monthly maintenance fees. Most children’s savings accounts do not charge monthly fees, but check the details before you open an account.
What Documents Do You Need to Open a Children’s Savings Account?
Most banks will want you to bring at least one of the following documents to open your child’s savings account. The documents should be in your child’s name:
- Birth certificate
- Social Security card
- Immunization records
- School photo ID
- Driver’s license (if your child is old enough to have one)
If you’re opening your kid’s savings account with an online bank, you will follow the usual online process for opening an account. However, in this case, a parent or guardian must open the children’s savings account as the joint account owner.
If you’re opening your kid’s savings account with a brick-and-mortar bank, you will typically need to visit your local branch to open the account. Consider taking your child along; the trip can be a fun occasion to help your kid learn more about banking. It might even feel like a rite of passage: Your child is joining the grown-up world of banking.
What is the Minimum Age to Open a Bank Account?
In most states, banks require account holders to be 18 years of age or older. So in the case of children’s savings accounts, a parent and child must jointly hold the account until the child reaches age 18.
What Happens to a Kid’s Savings Account When the Child Reaches Age 18?
Most banks will automatically convert a child’s savings account to a regular savings account when the child turns 18. Depending on your bank, there may be different fees, additional paperwork to sign or other decisions for your child to make. For example, your child might want full control of their account starting at age 18, without their parent or guardian serving as a joint account holder.
Talk with your kids about their overall banking needs as they become legal adults. For example, managing your child’s savings account can be part of a larger discussion about debit cards, credit cards, auto loans or other financial products your child may need as they enter adulthood.
Opening a children’s savings account can be a wonderful way to introduce your child to the world of banking and personal finance. While banks generally don’t pay high yields on kids’ savings accounts, these accounts can still be meaningful tools to start your kid on a responsible financial path from an early age.
Frequently Asked Questions (FAQs)
Do I have to pay taxes on the interest my child’s savings account earns?
Yes. Income reported on a form 1099-INT is taxable. However, if your child earned less than $11,000 in income from dividends and interest, you can claim your child’s interest earnings on your tax return instead of theirs.
What kind of savings account should I open for my child?
It depends on your savings goal. If you want to teach your child basic money management habits, a children’s savings account will be better. If your goal is to save for a child’s education, you’d likely be better off with a 529 plan or a Coverdell Education Savings Account.
How do I invest for my kids?
When investing for kids, it’s important to think about how the money will be used. If you want to jump-start a child’s retirement savings, you can open a custodial Roth IRA on their behalf. When saving for college, you’ll want to consider an investment account designed for education, such as a 529 plan.
Can I open a 401(k) for my child?
Since a 401(k) plan is an employer-sponsored retirement plan, a parent can’t open one on a child’s behalf. However, you can open a custodial Roth IRA if you want to start your child’s retirement savings early.
What bank account can I open for my child?
Parents can open either a children’s savings account or a custodial account. A children’s savings account lets your child withdraw funds from the account at any time. A custodial account, on the other hand, only grants the child access to funds after they turn 18.
How To Open A College Savings Account For A Child
The cost of college is on the rise, and no generation knows that better than millennials. Many young parents today are still paying off their own student loans; while trying to save for their children’s education. The good news is, starting a college fund while your child is young gives you a good amount of time to create a solid nest egg for their future. The decision now is where to put your money?
Bank Savings Account
For many parents considering how to start a college fund for their child, the first step may be a savings account at a local bank. It’s an easy way to put money aside for the future. Most banks will let you open a savings account with a small deposit and you can set up automatic transfers from your checking account to keep the fund growing. Interest rates for savings accounts are relatively low, providing about a 2 percent annual percentage yield (APY).
There is really no risk of losing your money with a savings account, as long as you choose a bank that’s federally insured. So, if your bank does happen to fail, the account is safe up to $250,000. Another benefit of a savings account is easy access to your money.
There are no penalties if you decide to use the account for a vacation instead of an education. But that may also be a temptation. So, if you’re likely to blow every penny on a trip to Disney World, this could be the wrong savings vehicle for your family.
For investors with a higher tolerance for risk, mutual funds may be a good path to save for college. Mutual funds offer diversification and potential for rapid growth, allowing your money to work harder. They are also easy to buy and sell through a broker or online account.
However, mutual fund distributions could mean you’re paying capital gains taxes on your investment every year, even if you don’t sell your shares. And when you do sell the fund to pay for college, you’ll pay taxes again. Speaking of college expenses, if you need to sell part or all of the mutual fund to pay your child’s college bill by a specific date, you could find yourself at the mercy of a down market swing. Another thing to remember, if the mutual fund account is in your child’s name, it could reduce their financial aid eligibility by 20 percent.
Coverdell Education Savings Accounts (ESAs)
Coverdell savings accounts gained popularity because the funds grew tax-free and could be used for elementary and secondary education expenses, as well as for college. However, many 529 plans, such as the NC 529, have changed their rules recently, to allow funds to be used for K–12 tuition at public and private schools.
ESAs also have strict contribution limits. You can’t deposit more than $2,000 per student, per year. And when the student turns 18, they take control of the account. That means the student can spend the money on anything they want, like spring break in Hawaii.
529 Savings Plans
Almost every state, including North Carolina, has a tax-advantaged 529 education plan. The name refers to section 529 of the Internal Revenue Code (IRC). The plans were added to the IRC in 1996 to encourage saving for higher education. The Tax Act of 2017 now allows the funds to be used for K–12 tuition. Financial experts say 529 plans are the smartest way to save for college.
Although 529 plan contributions cannot be deducted from your federal income taxes, the earnings grow tax-free and withdrawals are not taxed if they are used to pay for qualified education expenses. Those include:
- K–12 tuition
- College tuition
- Trade or technical programs
- Room and board
- Books, fees, and supplies
- Technology and computers
- Services and equipment for students with special needs
- Apprenticeship Programs
- Qualifying student loan payments
Investment options for an NC 529 Plan include mutual funds and cash reserves, to match your investment risk tolerance. Choose to be more hands-on with your investments or select an age-based portfolio that automatically moves funds out of riskier stocks and into bonds and cash reserves as the time for college draws near.
Other benefits of an NC 529 education plan:
- Makes saving simple with automatic payroll deductions or bank transfers.
- Family and friends can add to the account as gifts for birthdays or special occasions.
- Open an account in just a few minutes with a minimum $25 contribution.
For parents of very young children, you might be asking yourself, “What if my child doesn’t end up going to college?” No problem. Your 529 funds can be transferred to a sibling or another family member. Or you, yourself, may decide to go back to school, and the money will be there for you. If your child decides to pursue a career in cosmetology, automotive, or other industry, a college savings plan also can be used to pay for trade or technical school.