Having financial literacy at a young age allows children to reap many benefits when they are older. Opening a savings account for your child is the best way to get him started in this educational venture.
Many banks and credit unions offer special personal savings accounts for young children. This enables them to level up from the piggy bank style of saving to having a bank account to instill a savings habit.
Why your Child needs a Savings Account?
Parents who expose their children to personal finance at an early age are most likely to have kids who will become smart with money.
A personal savings account will also help your child set financial goals, like for example saving for a new toy, and practicing the habit of saving money over time to reach it.
Start talking to your child about his goals and encourage him to save for something he likes. Then whenever he receives money for holidays or a birthday, he can deposit it into his savings account. You can also discuss with your kid setting aside a certain portion of his allowance.
A kid’s account serves as a learning tool for your child and setting him off on a path to financial responsibility helps your child set up for success later in life. More importantly, a savings account can help teach your child money management skills.
The Best Types of Savings Accounts for Kids
To open any type of savings account for your child, here are some of the information you need to provide the financial institution. Some institutions may require additional information or documents:
- Parent’s name, address, date of birth
- Parent’s Identification (passport or driver’s license)
- Parent’s social security number
- Child’s birth certificate or social security card (in place of a driver’s license)
- An initial deposit, if required
Here are some of the best types of savings accounts you can open for your child.
- Regular Savings Account
You can open a personal savings account in your name as a parent saving for your kid. You can opt for high-yield savings account for yourself but keep the amount for your child.
You can be the sole contributor to the account but you can also, for example, make your child save a portion of his allowance or cash gifts for deposit to the account.
- Joint Account
Opening a joint account with your child is just like opening a savings account for yourself except that the account is in your and your child’s name. You and your child can make deposits and withdraw funds from this account.
- Custodial Account
This is a savings account you, as the parent, controls for your minor child.
There are two types of custodial accounts:
- Uniform Gift to Minors Act (UGMA) Account. Can hold cash or securities.
- Uniform Transfers to Minors Act (UTMA) Account. This account can hold cash or securities, intellectual property, or real estate.
Under the UGMA and UTMA, parents or legal guardians can open a custodial account, and manage and deposit funds but the minor child is the primary beneficiary and owner of the account.
The minor is not allowed to withdraw funds until the age of 18 or 21 depending on your state. However, you as the parent can use the money as long as it is directly for the child.
A Custodial IRA (Individual Retirement Account) for your minor child with an earned income. This retirement savings account is ideal for minors who, even at a young age, have income. Just like a typical custodial account, all funds and assets belong to the minor child but are managed by the custodian.
A custodial savings account can have tax benefits on interest income. Before opening this account, take a close look at the tax and financial terms for you and your kid.
A Certificate Account (CD) is another type of account you can open using a custodial account. You can add CDs to the account on behalf of your child. CDs are low-risk investments and can teach your child the benefits of saving and investing.
- 529 Account
A 529 account is solely for educational purposes. This account is pretty much similar to an investment account, although the specifics vary by state. When you deposit to your child’s 529 account, the account balances grow.
Contributions to a 529 plan are tax-deductible, provided the funds are for qualifying educational expenses. There are no taxes on withdrawals, too.
Unlike a savings account, your child cannot withdraw from his 529 account for any purpose other than for his educational expenses. If the withdrawn amount is used for other purposes, it will be subject to state and income taxes and a 10% penalty on the amount withdrawn.
Because of the limitations of this account, it is wise to have a separate savings account for your child other than a 529 account.
- Reloadable Prepaid Debit Card
Most parents who are unsure of what type of kid’s account to open but want to open a bank account for the child opt for this type of account.
- Club Savings Account
This is a bank account targeted specifically for minor children. A club savings account has child-friendly features to encourage your child to save money. Most banks offer this account for depositors 0-12 years old.
A club savings account usually comes as a Youth Club Account for depositors 0-12 years old and a Teens Club Account for those 13-18 years old.
The minimum amount to open this account is low, typically $5. Some banks do not have a minimum amount of deposit to open this account. An adult (parent or guardian) should be a joint depositor.
Financial institutions often offer birthday presents and fun activities for club savings account depositors.
How to Choose the Best Savings Account for Your Child
The best savings account for your child should provide these benefits:
- Have features that simplify the saving process.
- Comes with child-friendly features for learning.
- Provides easy access for parents to contribute to the account.
- Easily allows the parent to withdraw funds with their children.
- Low minimum initial deposits
- A competitive interest rate.
- APY (Annual Percentage Yield) of the account
- Zero to low monthly fees.
- Number of deposits and withdrawals allowed per month
- How your child can or cannot access the account
- How much access you as the parent or guardian can have to the account
- Should have great educational tools to encourage kids to save.
- The financial institution should be insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA)
Opening a savings account for your child can encourage him to save and have financial literacy at an early age. If your child learns how to manage his money at an early age, he is on his way to financial success as an adult.