Why your child should have a savings account and how to open one

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Every parent wants to see their child flourish, and here’s one great and easy way to help make that happen.

Teaching them about money while they’re young by opening a savings account is a great way to help them mature and become financially responsible. There’s no better way to learn about money than with a custodial account.

Custodial accounts can be Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. With an UTMA, any kind of property, whether it’s real or personal, tangible or intangible, can be transferred to a custodian for the benefit of a minor, according to the Social Security Administration. An UGMA account only allows gifts of cash or securities.

Whether you’re able to open an UGMA or an UTMA for a child will depend on the bank and the state that you live in, according to the United States Office of Government Ethics. If a bank doesn’t offer custodial accounts, an adult may be able to open a joint account with a minor child. Check with your bank. And if it is a joint account, be aware that your child may have full access to this account. With an UTMA, children generally can’t access these accounts as minors.

Look for a children’s savings account with no maintenance fees, no minimum balance requirement and a high annual percentage yield (APY). A high yield is important so that children can really see money earmarked for their future grow, and to keep up or stay ahead of inflation.

Some online savings accounts may allow you to title them as an UGMA, UTMA or a joint account with a minor.

A child under age 18 generally cannot sign legal documents, even to open a savings account. However, parents can open a bank account for their child, and when the child is old enough, let him or her take ownership of it.

There are many benefits of opening a savings account for a child. Among them:

  • It teaches them to plan ahead.
  • It teaches them to stay focused on goals and priorities.
  • It shows how their money can grow, thanks to compound interest.
  • It teaches them to save for the things they want until they can afford it.
  • It teaches them the value of money and not to waste it.
  • They learn basic math skills.
  • They can learn how to deposit a check.

A parent must use good judgment, or the benefits of a child savings account can be negated.

Learning financial responsibility takes time, so don’t give your child more than he or she is ready to handle.

Here are some things to consider when it comes to opening a savings account for your child.

1. Open a savings account, not a checking account

Checking accounts are for spending money. You’re trying to teach your child how to save. It’s advisable to wait until your son or daughter is a teenager or has a job before allowing them full access to a checking account.

You may need to supply some identification documents for your child during the account opening process. For instance, Wells Fargo requires that the child either present a driver’s license, if they have one, or be with an adult who has been a Wells Fargo customer for at least 60 days.

In addition, you must present one of the following documentation items for your child: a Social Security card, birth certificate, immunization record, school ID (with a photo) or a child’s passport/alien ID.

2. Bank at the branch and online

Your child may be tech-savvy enough to do basic banking functions online, but it’s also imperative that they learn proper banking etiquette at a brick-and-mortar location.

Let your kid hand the teller his or her babysitting money every week and safe-keep the paper deposit receipts while still encouraging online banking vigilance to track how the deposits are growing.

When your child gets older, he or she will choose their preferred banking method. For a young child just learning about money, the tangible experience of visiting a physical bank reinforces solid financial lessons.

3. Find a bank that promotes financial education

There is nothing wrong with opening a standard adult savings account and having your child put his or her allowance in there. But some financial institutions make saving fun and teach kids good money habits. Ask a banker and check the bank’s website for money tutorials for young people.

The Consumer Financial Protection Bureau website, a financial regulatory and education agency, is also a good place to find information on this topic.

Here are some savings options for children. Brick-and-mortar banks may offer UGMA or UTMA accounts, depending on the bank and the state. But the interest rate may be substantially lower than at an online bank that offers a custodial account, in some instances. An online bank may allow its savings accounts, even if they aren’t specifically children’s savings accounts, to be titled as an UGMA or UTMA account.  Generally, children’s account options have low minimum balance requirements.

  • Alliant Credit Union: Alliant’s online kids savings account is available for children 12 years and younger. Its accounts are available nationwide and it offers a yield of 2.10 percent APY. Even if you don’t work for an employer linked to Alliant Credit Union, you can still pay $5 and Alliant will donate it on your behalf to Foster Care to Success so that you’re eligible to open an Alliant account. Alliant has educational content on its site and encourages children to use the Alliant Mobile Banking App to learn about banking firsthand.
  • Bank of America: Has a minor savings account. It needs to be jointly owned by the minor and a parent/guardian. But the account’s APY is below the national average for savings accounts.

Bank of America’s site has educational content teaching children about money.

  • Bethpage Federal Credit Union: This credit union offers 4.00 percent APY, on the first $1,000, on both its Youth Savings Custodial NYUTMA and its Young Adult Savings. The Youth Savings Custodial NYUTMA is for children 0-17. And the Young Adult Savings is for those 18-20. You must be a New York resident to be eligible for this account. Bethpage Federal Credit Union has a My Money 101 financial education program.
  • Capital One: Currently offers a competitive APY that’s six times the national average on all balances on its Kids Savings Account. The account doesn’t have a maintenance fee and allows children to set up a savings goal. The account’s app also features parental controls and Capital One’s website has Kids Savings Account: 101, which features the basics regarding saving.
  • Golden 1 Credit Union: The Golden 1 Youth Savings account has a low minimum opening requirement of $1. If you work or live in California, or belong to one of the nearly 1,000 employee groups, you can join Golden 1 Credit Union. The Golden 1 Youth Savings account earns twice the national average APY for savings accounts.The Golden 1 has a Financial Wellness Center on its website with online videos, webcasts webinars, podcasts and a learning lab.
  • USALLIANCE Federal Credit Union: The MyLife Kids Savings account allows kids to earn 3.05 percent APY on the first $500 deposited. Children also earn $10 in “Birthday Bucks” each year. The account transitions into a MyLife Teen Checking account or a MyLife Savings account when the child turns 13. The USALLIANCE Federal Credit Union website has a budgeting aid and a Financial Education page that has a Student Center.
  • Wells Fargo: Offers multiple options for setting up your Kids Savings accounts. You can open a joint ownership, minor by or UTMA/UGMA account. The Wells Fargo Kids Savings Account only requires a $25 minimum opening deposit and doesn’t have a monthly service fee for account holders who are under 18, 19 in Alabama. Wells Fargo also has a Student Center on its website.

4. Look for the highest yields

Search for high-yield savings accounts. Credit unions and online-only banks typically offer the best rates, but don’t just shop for rates. Accounts with the highest rates may not have other features you may want.

5. Avoid account fees and ask about features

Some banks and credit unions will waive monthly fees and minimum-balance requirements if the account is for a minor child. Ask about account perks and features, such as an ATM card. Look for an account with the highest APY and a low minimum balance requirement.

6. Don’t forget about saving for college

Most parents can’t afford to wait when it comes to saving money for their child’s education. The average cost to send a child to a public, in-state, four-year institution is $10,230 per academic year, according to the College Board. It’s $35,830 for a private, non-profit four-year school.

There are a variety of ways to build up savings for that daunting expense. You just have to decide which one works best for your family’s goals and circumstances.

  • 529 account: Most college savings are in 529 plans Similar to a Roth IRA, 529 college savings plans allow parents to invest after-tax money into diversified, low-cost stock and bond funds and then withdraw the money tax-free for qualified education expenses.
  • UGMA/UTMA accounts: UGMA and UTMA accounts are custodial accounts that allow parents, grandparents and others to transfer assets to a minor child. The assets are managed for the child until he or she reaches adulthood. Custodial accounts are considered assets. Therefore, they have tax implications. Be wary of these accounts if you suspect your child may one day need financial aid to attend college — custodial accounts can disqualify a student or reduce how much they qualify to receive.
  • Education Savings Account, or ESA: Also known as “Coverdell ESAs,” these accounts get no special tax treatment from the states, but federal taxes are deferred. The IRS doesn’t tax withdrawals as long as they are used for qualifying education expenses. ESAs have little impact on eligibility for financial aid, even if the student owns the account.

Whatever your financial goals are for your child, make learning about money fun. The rewards will pay off handsomely for both of you.

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Written by
Matthew Goldberg
Consumer banking reporter
Matthew Goldberg is a consumer banking reporter at Bankrate. Matthew has been in financial services for more than a decade, in banking and insurance.
Edited by
Senior mortgage editor