A savings account for youngsters can introduce them to the idea of putting money away and even help them learn about concepts like compound interest. They can deposit money from birthdays, holidays, chores, allowances and eventually part-time jobs. Banks and credit unions offer special accounts geared toward children.
One of the key points of opening a savings account for children is to put them on the path toward financial wellness as an adult.
Meg McIsaac, president of Massachusetts-based Bluestone Bank, suggests these tips for teaching kids about banking, based on their age:
What Is a Children’s Savings Account?
Banks and credit unions usually offer accounts for kids under 18 that provide features that differ from traditional savings accounts. To start with, the account must be co-owned by an adult, usually a parent or perhaps a grandparent, other relative or guardian. Features to look for in a kids’ savings account include:
- Minimum opening deposit or minimum balance requirement that is low (maybe $25) or perhaps even zero.
- No monthly maintenance fee.
- Higher interest rate (although this may be limited to amounts under, say, $1,000).
- Access to online banking so the child can track savings.
- ATM card.
- Online tools to promote financial literacy.
“With a little shopping around, free accounts and services can be found near where you live. If in-person service is important for your child to learn about financial services, avoid internet-only banks,” McIsaac says.
Trisha Menke, retail banking director at Bank Iowa, stresses the importance of doing business with a bank or credit union that’s committed to your child’s financial wellness. She says her bank demonstrates that commitment by, among other things, giving a copy of the book “Eleanor Saves the Day” to every kid who opens an account. The illustrated book, produced by Bank Iowa, centers on a young entrepreneur who wisely saves and invests her money.
Here are four examples of kids’ savings accounts:
- Alliant Credit Union Kids Savings Account. Alliant promotes this account as being ideal for kids 12 and under. The credit union covers the $5 initial deposit and waives monthly fees if you opt for electronic, rather than paper, statements. As of September 2022, the account paid a hefty annual percentage yield of 1.8% with an average daily balance of at least $100.
- Capital One Kids Savings Account. Capital One requires no minimum deposit or minimum balance for this account. Also, the account doesn’t charge monthly fees or maintenance fees. As of September 2022, the account’s APY was a decent 0.3%.
- PNC Bank S is for Savings Account. There’s no minimum deposit to open one of these accounts, and the $5 monthly service fee is waived for those under 18. For account holders, the bank provides access to its Sesame Street-themed learning program. One drawback: As of September 2022, the APY sat at 0.01%.
- TD Bank Simple Savings Account. This account eliminates the monthly maintenance fee and the minimum balance requirement if you’re 18 or under. Plus, there’s no minimum opening deposit. The APY isn’t all that attractive, though. It was 0.02% as of September 2022.
Where Should You Open Your Kid’s Savings Account?
You may want to open the account at a bank or credit union that operates local branches because it could be part of the youngster’s financial education to visit the bank, from opening the account in person to visiting a teller to make deposits and withdrawals.
“It takes a lot of effort to change where you bank, so put effort into making the best choice. Many account holders remain with their original banks or credit unions for decades,” McIsaac says.
When you open the account with your child, you will need a government-issued ID for yourself, such as a driver’s license or passport, or perhaps other documents since your name will be on the account. For your child, you may need to present a birth certificate.
Keep in mind that if you’re opening an account at a credit union for the first time, you may need to meet membership requirements to join the credit union. Some online-only banks also offer kids’ savings accounts.
Menke says the choice of a bank or credit union now could carry long-term consequences for your child.
“Who your child banks with today may very well be who they bank with tomorrow,” Menke says. “(Fintech companies) are cool, but will they be around long enough to see your kid through those early financial milestones when their credit file is still thin, such as a car loan, student loan or even their first home?”
Are There Taxes on Kids’ Savings Accounts?
Interest earnings for a children’s savings account are subject to income tax if they exceed a certain amount.
If your child’s interest, dividends and other unearned income total more than $2,200 in one year, the unearned income for certain children might be hit with federal taxes. This income can be reflected on your child’s tax return or on your own tax return.
Because of these tax implications, it’s not wise to use a traditional savings account to put aside money for a child’s college education. Instead, you should consider a savings plan that’s dedicated to saving money for a child’s college expenses. This type of account is known as a 529 plan.
If no early withdrawals are made from a 529 plan, the earnings won’t be taxed. Once money is taken out to cover certain education expenses, the withdrawals might be free of federal and state income taxes.
No income restrictions are placed on 529 accounts. To set up a 529 plan, you must:
- Be a U.S. resident.
- Be at least 18 years old.
- Have a U.S. address.
- Have a Social Security number or tax ID number.