By Jacqueline Paladino, Bank of America | With April, Financial Capability Month, ending, many parents are using this time to prepare their children for financial success. For generations, children have learned the basics of money through a savings account. Opening an account in your child’s name can help them understand the importance of putting away money for the future. They can take pride in watching the balance grow, appreciate delayed gratification, set goals for special purchases and learn the value of compound interest.
Some banks may require children to reach a certain age before opening an account, while others have no age restrictions. Many experts believe that by the age of 9, a child is considered mature enough to graduate from piggybank to savings account.
How to open a savings account for your child
Before you open the account, you’ll want to review interest rates, monthly maintenance fees, minimum opening deposit and minimum balance requirements. Most banks will want at least one of the following documents for your child:
- Birth certificate
- Social Security card
- Immunization records
- School photo ID
- Passport
- Driver’s license
Some financial institutions will let you open the account online and upload the documents. And some require the parent to have an existing account before opening one for a child.
What savings account fits your child’s needs?
Consider how much access you’re likely to need to the money, and whether you want the account to include investments such as mutual funds. Here are common types of savings accounts that can benefit kids:
Youth savings accounts
Youth savings accounts are similar to the ones adults have, but usually offer lower minimum balances and little to no maintenance fees. You and your child will have joint ownership of the account, granting you access to monitor account activity and make withdrawals and deposits.
While your child will also have access to the account, most financial institutions let parents set specific limits on the child’s use. For example, you may decide to allow your child to only make deposits, or you may cap the number of withdrawals and the amount of money taken out.
Once your child reaches adulthood or an age set by the financial institution, you can transfer ownership of the account.
Expert tip: Encourage your child to regularly deposit a portion of their allowance and monetary gifts from relatives into the savings account. You can provide an extra incentive to save by matching their contributions up to a certain dollar amount.
Custodial savings accounts
These accounts are created by a parent or grandparent for the benefit of a child or grandchild. They fall under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), and contributions can be invested in stocks, bonds, mutual funds and other securities.
As the custodian, you manage the account, but the money belongs to your child. You are responsible for transferring the assets to your child when they reach the age set by your state, usually between 18 and 21. You are permitted to take money out of the account before then, as long as you use it to benefit your child directly—for example, by paying tuition for summer camp, hiring a tutor or contributing toward a first car.
Custodial savings accounts can provide income tax benefits on investment income. At the same time, they can reduce a child’s eligibility for need-based federal financial aid for college. Contributions to the account over a certain amount might result in your using a portion of your lifetime estate and gift tax exemption or paying gift tax. Before opening this type of account, speak with a tax professional and carefully review the tax and financial aid considerations for you and your child.
529 education savings plan
A 529 education savings plan can be a great way to start planning for your child’s future education expenses. It’s an income tax-advantaged account that helps you invest early to make college more affordable in the future.
529 plans generally offer a mix of investment portfolio options, in addition to convenient ways to contribute funds. Contributions grow free from federal, and possibly state, income taxes. You may also be eligible for a state income tax deduction for contributions made to your home state’s 529 plan.
Withdrawals are not subject to federal or state income tax when used for qualified education expenses. Qualified expenses include college costs, private K-12 tuition ($10,000 per year), student loan payments ($10,000 lifetime cap) and certain costs related to apprenticeship programs, in addition to other expenses.
If you use withdrawals for nonqualified expenses, in addition to other expenses, the earnings portion may be subject to federal income tax and an additional federal tax of 10%, as well as state and local income taxes. The additional tax does not apply if the beneficiary dies, is disabled, attends a military academy or receives a scholarship, as long as the withdrawal does not exceed the amount of the scholarship.
How kids’ savings accounts encourage good money habits
Any of these savings accounts can provide an easy and practical way to advance your child’s financial education. You may want an account that offers access to mobile apps so kids can easily view their accounts. And you might want to think about whether the bank has online learning tools that can help them improve their money smarts.
You can also use savings accounts to help your child:
- Establish a budget and set savings goals
- Understand basic money concepts, such as how interest accumulates
- Advance to more sophisticated financial tools, such as checking accounts
- Learn how to use online and mobile banking apps
Saving can be a bonding experience for you and your child, giving them greater confidence in their ability to navigate the world and enabling you to help them build a strong foundation for their financial future.