For parents who want to teach their kids about money and financial literacy, one of the best things to do is to help your child open a savings account. Many banks and credit unions offer special savings accounts for kids that can be opened under the child’s name.
Opening a kids’ savings account can help your child learn more about managing money, saving for the future and other aspects of personal finance, starting from a young age.
Before you open your child’s savings account, it’s important to do your research, shop around for rates and features and decide what the most important priorities are for having a savings account for your child. Several states have laws around allowing minors to open savings accounts; check with your local financial institutions to make sure this option is possible where you live.
Here are a few of the top considerations to keep in mind when looking for a children’s savings account.
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 funds from the account (with the parent being able to monitor the account).
If you open a custodial account, also referred to as a Uniform Transfers/Gifts to Minors Act (UTMA/UGMA) account, the money in the account is treated as a gifted asset that is fully owned by your child, and cannot be accessed until they turn 18. There are potentially complicated tax implications for using this type of account. So unless you have a particular reason to want to choose 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 the magic of compound interest, different types of financial accounts and how to manage money in everyday life.
- To help your children learn more about banking. Your child can learn how to do online banking, how to deposit a check, how to handle real-life banking conversations at a brick-and-mortar bank and more.
- To help your kids develop the habit of saving their own money that they receive from an allowance, getting paid for chores or a part-time job. If you are trying to teach your child how to manage their money, how to save a certain percentage of their income or how to use money for different financial goals, having a savings account can make all of this more real for them.
- To save money for a specific short-term financial goal. For example, if your child wants to buy a new video game console, wants to save money for summer camp or wants to save up for some other special purchase, they could use their savings account to save for these specific goals.
Having their own savings account can help your child learn how to set financial goals and make decisions about how to use their money responsibly. Talk with your child about their savings account before you choose a bank or credit union. Make sure your child is old enough to understand and be curious about saving money.
See 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 choice of 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 has caused the Fed to cut interest rates to near zero, and many banks are paying near-zero interest rates on savings accounts. The same is true for kids’ savings accounts. You’re probably not going to find very high APY rates in today’s low-interest rate environment. Some of the highest-yield kids’ savings accounts include:
- First Internet Bank Tomorrow’s Tycoon Account: 0.70% APY
- Capital One Kids Savings Account: 0.50% APY
These are some of the highest APY rates on children’s savings accounts that are available from banks as of July 13, 2020. Some credit unions offer higher APY rates than these, but you may have to be a member of a particular employer, organization and/or live in a certain state in order to participate in those accounts.
Other national banks like Wells Fargo and Bank of America offer children’s savings accounts, but the APY rates are quite low, almost zero. Don’t expect to get a high-yielding account for your child’s savings. The primary goal of a child’s savings account is not to build significant wealth or accrue a big ROI; rather, it’s to learn about money and have 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 rate, the best children’s savings accounts sometimes offer unique features that can help make saving fun for kids. For example:
- Matching programs. Wells Fargo can help parents set up a “savings matching program” for their kids.
- Automatic savings plans. Other banks may offer an automatic savings deposit plan, where a certain amount of money can get transferred into the child’s account automatically each month.
- Financial education. Some banks offer a special financial education website for kids, with interactive activities to help kids learn about money. Bank of America’s Better Money Habits website helps parents and kids learn about money.
- Mobile apps/online banking. See what features are available for your child to use online banking, mobile banking or deposit checks via mobile app. Children are often tech-savvy, and they may enjoy saving money even more if they can make a game of it with mobile technology. Parents also have access to the account’s banking app.
- Savings goals. The Capital One Kids Savings Account lets you set up multiple accounts and track different savings goals. For example, you could help your child set up separate accounts for “Summer Camp,” “New Bike” or “New Xbox.”
- Debit card. Some banks will offer debit cards that your child can use to get cash 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 make sure it is an FDIC-insured institution.
These are just a few of the specific features for kids’ savings accounts that you may want to look for or ask about; some banks have more customized offerings than others.
What Are the Fees and Requirements of a Children’s Savings Account?
Kids’ savings accounts tend to be fairly simple, straightforward products offered by banks, but some banks will charge a few fees or have different requirements for the accounts. Watch out for different requirements for:
- Minimum opening deposit. Some kids’ savings accounts have a very low minimum opening deposit, like $25 or less. Others might require $100 or more. It depends on the bank. Be prepared to help your children save up (or give your child a “down payment”) to cover the opening deposit on their savings accounts.
- Minimum daily balance. Pay attention to the minimum daily balance requirements. Many children’s savings accounts don’t require your child to have any money in the account, but some might require keeping a minimum daily balance to avoid being charged a fee.
- Monthly maintenance fees. Most children’s savings accounts do not charge monthly fees, but make sure to 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 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
- Passport
- 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 procedures for opening an account. In this case, it’s the parent who’s opening 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 set an appointment to visit your local branch to open the account. Take along your child and this can be a fun occasion to help your kids learn more about banking and might even feel like a rite of passage: Your child is becoming part of the world of banking.
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 adjustments that your child may want to make to their account. For example, your child might want to have full control of their own account starting at age 18, without their parent’s serving as a joint account holder.
Talk with your kids about their overall banking needs as they become legal adults. Managing your child’s savings account can be part of a larger discussion about debit cards, credit cards, getting an auto loan or other financial needs your children may have as they enter adulthood.
Bottom Line
Children’s savings accounts can be a fun and educational way for your child to save some money of their own and watch their savings grow over time. Most banks are not paying high yields on kids’ savings accounts, so don’t expect to use these accounts as a way to generate big returns or build a large nest egg for college; 529 plans are a better choice for that goal.
A kids’ account is a safe place for your child to keep their money and to develop good savings habits. If you want to make it easy to help your child learn about money, how budgeting works and how to save for specific goals, opening a children’s savings account can be a wonderful way to introduce your child to the world of banking and personal finance.
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