Savings accounts for kids: A guide for parents

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Savings accounts for kids: A guide for parents

Whether your child’s piggy bank is stuffed, or you want to be proactive about teaching them smart money habits, a kids savings account can be a great tool to kick off building your child’s financial literacy.

What is a kids savings account?

Parents can open a savings account and designate it for a child, even when minors can’t open an account by themselves, Ally Financial reports. As the account owner, you can use it as a tool to teach your child the ins and outs of saving money.

Alternatives to a kids savings account

Savings accounts aren’t the only way to secure your child’s financial future. Other accounts include:

• Kids checking accounts: This is particularly useful for older children learning to manage spending with a debit card. This could be set up as a checking joint account with a parent, for example.
• Custodial accounts: The most common types of custodial accounts are known as Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), depending on your state.
• 529 college savings plans: Plan for future education expenses with this state-sponsored, tax-advantaged investment account.

Benefits of opening a kids savings account

Financial habits start young. Opening a savings account for your child can provide them with several benefits in the long run:

• Encourage early financial literacy.
• Teach children the importance of saving.
• Enable parental controls for monitoring and guidance.
• Earn interest on savings.

Top features to look for in a kids savings account

As you start to explore accounts, consider ones with:

• High annual percentage yield (APY): A good feature to consider when comparing savings accounts is APY, which accounts for the interest rate and compounding periods. The more frequently interest compounds, the more you could earn.
• No monthly fees: Without monthly maintenance fees, your child can keep 100% of their savings, potentially maximizing growth through compound interest.
• Parental controls and monitoring: With a joint checking account, you can keep an eye on account activity and set spending limits to help teach financial responsibility, and with a UTMA/UGMA account, you can restrict access to funds.
• Access to ATMs: Give your child hands-on experience in dealing with money by choosing an account that offers access to ATMs.

How to open a kids savings account

You can open a savings account online in just a few steps:

1. Choose the right bank: Compare different financial institutions’ fees, interest rates and features.
2. Gather necessary documents: To open an account on behalf of your child, you’ll typically need their Social Security number and a form of identification.
3. Apply online: Many financial institutions offer online applications for convenience. Just keep in mind, this would need to be set up as a custodial account.
4. Set up parental controls: Once the account is approved, you can customize the settings, depending on the account type, to either monitor and guide your child’s financial activities or restrict access to funds.

Is a child’s savings account taxed?

Just like adults’ accounts, children may be taxed on interest earned in a savings account.

Can I open a joint account with a child?

If you want to teach financial responsibility or manage money together, you might consider opening a joint checking account — if your state and financial institution allow it.

Joint accounts typically require an adult to serve as the primary account holder. Remember, joint account owners have equal access, so unless there are parental controls, your child will have full access to the money in the account.

What happens when my child turns 18?

At this point, their kids savings account could be converted into a standard adult account, granting them full legal control, sole ownership and the ability to withdraw funds without parental consent.

Start saving early

As a parent, you want to set your child up for success as they get older. Guiding your kids with smart financial behaviors can benefit them now — and in the future.

This story was produced by Ally Financial and reviewed and distributed by Stacker.