It’s never too early to teach kids to save money. One of the best ways to do this is to open a savings account. But how do you open a savings account for your child? This guide will teach you what you need to know.
1. Select a Savings Account Type
What is you or your child’s savings goal? Depending on your answer, there’s a savings account just for you.
Let’s explore the three common savings account types.
Joint Accounts: Build Savings Habits
Joint accounts are a great option if you are looking to teach your child about saving and banking. Under this account type, both you and your child own the account. And that’s great because you can deposit, withdraw, and manage the funds independently as co-owners. This account comes with fewer restrictions than other types and is a great way to help your child develop savings habits with cash. It’s available at most banks.
Custodial Accounts: Manage Investments
Does your child have more assets than just cash? Then a custodial account is the option for you.
Under this account option, an adult custodian manages the assets on behalf of the child. Some of these assets may include cash, stock, and property.
While the child owns the account, management responsibility doesn’t transfer to them until they turn 18 or 21. Also, because ownership resides with the child, contributions or gifts made to this account are considered irrevocable.
Custodial accounts are also known as Uniform Gifts to Minors Act (UGTM) accounts and Uniform Transfers to Minors Act (UTMA) accounts. Because of its flexibility, many people use these accounts to gift assets to their children instead of having a formal trust. Be mindful that a gift of more than $18K or $36K for married couples for 2024 may trigger tax consequences.
These accounts are provided by brokerage and investment companies instead of a bank.
529 Account: Save for College
A 529 plan is ideal for saving for college. This investment-based account is popular because of its tax advantages. Namely, the contributions grow tax-free, and qualified withdrawals aren’t subject to taxes. It’s also favored for its beneficiary flexibility, high contribution limit, and lack of income restrictions.
However, this account does have some drawbacks. The most notable is that the funds must be used for qualified educational expenses. If not, the withdrawals will be subject to penalties. Also, having a 529 account may affect your child’s financial aid.
While 529 plans are not typically offered at a bank, you can open one with your state or an investment company.
Identifying your savings goal will help you select the right account type. Your choice of account will also determine which financial institution—a bank, investment company, or state—can open it.
Since joint accounts are the most common, let’s look at this bank savings account in more depth.
2. Compare Your Options
Now it’s time to do some comparison shopping.
Here are 8 factors to compare before opening a joint savings account for your child at a bank.
1. Interest Rates
Research the interest rates offered by different banks or credit unions. While interest rates on savings accounts are generally modest, a higher rate can help the child’s savings grow more quickly.
2. Fees and Charges
Be aware of any fees associated with the account, such as maintenance fees, withdrawal fees, or minimum balance requirements. Look for accounts with minimal fees to maximize the child’s savings.
3. Age Restrictions
Check if there are any age restrictions for the account. Some accounts may be specifically designed for younger children, while others may cater to teenagers.
Also, understand how the account transitions as the child ages. Some kids’ savings accounts automatically convert to standard savings or checking accounts when the child reaches a certain age.
4. Accessibility
Whether accessibility is provided through online banking, mobile apps, bank branches, or ATMs, go for ease of access and convenience.
5. Parental Controls
If the child is younger, parental controls can be beneficial. Inquire about accounts that allow parents to monitor and manage the child’s transactions, set spending limits, or receive notifications.
6. Incentives or Rewards
Some banks offer incentives or rewards to encourage saving. This might include bonus interest rates, gifts, or other perks, adding to the appeal of an account.
7. Educational Features
Look for accounts that offer educational features to teach children about money. Consider banks that provide tools, resources, or interactive platforms to help kids learn the basics of saving and budgeting.
8. Bank Reputation
Choose a reputable bank with a history of providing reliable and customer-friendly services. Read reviews, check customer satisfaction ratings, and ensure that the bank has a strong reputation for security and reliability.
Next, it’s time to take some action.
3.Make an Appointment at the Bank
Schedule an appointment at the bank to open a joint savings account. You can also discuss the documentation needed to complete the account application.
TIP: Some banks allow members to open accounts online. Check with your bank of choice to see if this is an option for you.
4. Bring Your Documentation
To open a savings account for a child, you typically need to provide certain documents and information. The exact requirements may vary depending on the bank and regulations.
Here’s a list of 7 items you may need:
1. Child’s Identification
Bring official identification for the child, such as a birth certificate, Social Security number, or passport. Some banks may accept a government-issued ID for older children, such as a student ID or state ID.
2. Parent Identification
The parent opening the account will need to provide identification as well. This could include a driver’s license, passport, or other government-issued ID.
3. Proof of Address
The child and the parent or guardian may need to provide proof of address, such as a utility bill, rental agreement, or official government document. This is to confirm the current residence.
4. Social Security Number (SSN) or Tax Identification Number (TIN):
The child’s Social Security or tax identification number is typically required for account opening. This information is necessary for tax reporting purposes and to comply with financial regulations.
5. Minimum Deposit
Some banks may require an initial deposit to open the account. The minimum deposit amount can vary, so inquire about this requirement when choosing a bank.
6. Parental Consent
Parental consent may be required to open the account if the child is under a certain age. This consent may need to be provided in person at the bank or through a signed form.
7. Proof of Relationship
In cases where the person opening the account is not the child’s biological parent, legal guardian, or custodian, additional documentation proving the relationship or legal authority to act on behalf of the child may be required.
With this information, you’re now ready to complete your account application.
5. Complete Your Application
If you haven’t completed your savings account application online, your banker can help you with this step. They will use your documentation to complete this process.
Once completed, the account will be opened. You will also receive account details such as your account number, ATM card, and deposit receipt.
6. Begin Saving
Now that the account is opened, you can encourage your child to begin saving.
Here are a few ideas to get you started.
- Make regular trips to the bank or ATM to deposit money together
- Set-up automatic transfers to help your child develop a savings habit
- Review bank statements together and talk about transactions
- Set a goal to save $100
Your child is well on their way it developing saving habits for life.
FAQ
What is the Youngest Age You Can Open a Savings Account for a Child?
While the minimum age to open a savings account can vary by bank, you can open accounts for a baby, kid, or teen. However, in many cases, youth under 18 years of age can’t open an account on their own. They will need their parents’ help as joint holders or account custodians.
Do You Have to Pay Taxes on a Savings Account for a Child?
The tax implications of a kid’s savings account depend on various factors, including the amount of interest earned, the child’s total income, and the tax laws in your specific jurisdiction. Here are some general guidelines to consider:
- Standard Deduction – A child may not be required to file a tax return if their total income, including interest income, is below the standard deduction of $14,600 for 2024.
- Kiddie Tax Rules – Some jurisdictions have “kiddie tax” rules that apply to children with unearned income above $2,500. These rules may result in the child’s income being taxed at their parents’ tax rate, especially if the child’s income is substantial.
- Gift Tax Considerations – If the child receives a substantial amount of money as a gift and that money is subsequently placed in a savings account, gift tax considerations may come into play.
Consult with a tax professional or financial advisor to understand the specific tax implications of a kid’s savings account in your jurisdiction. They can provide guidance based on your individual circumstances.
Conclusion
Opening a savings account for your child is a great way to encourage them to save money. Knowing your preferred account type, comparing account features, and engaging a banker are necessary steps to open a savings account at the bank.
Empower your child to develop good savings habits by opening a savings account for them today.
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