Should You Open a Savings Account for your Kids?

There are significant advantages of saving for your children’s future from an early stage, so it is a good idea to open a savings account for your kids. According to the U.S. Department of Labor, compounding investment earnings and savings account interest is “magic” for your bank account. And you can easily put this magic to work by opening a savings account for your children. After all, time is your child’s greatest financial investment: Every dollar they save today has years (or even decades) to grow, generating the potential for significant wealth and a healthy financial future.

But getting your child started with savings and investments isn’t as simple as simply opening a savings account in their name. From navigating specific age-related banking regulations to identifying potential tax opportunities and pitfalls, here’s what you need to know before you open a savings account for kids.

Why You Should Open a Savings Account for Kids

First and foremost, the top financial advantage of a children’s savings account is the value of time. A small deposit invested today, given years to grow, will far outperform a much larger investment made years later. Your child has many decades before them, and a little financial planning right now will pay off in dividends (both figuratively and literally).

Let’s say you have a children’s investment account with a moderate 7% annual percentage yield, which is quite conservative for the status of the current stock market.

Imagine that you decided to invest only $1 a day, but you started saving and investing that money on the day your child was born. By the time they turn 18, you would have invested a total of $6,570 but achieved a return of $6,599 for a total future balance of $13,169.

In contrast, if you waited until they turned five to get started, that final balance would only be $7,740.

And it isn’t easy to play catch up. For instance, if you waited to start saving until your child was 15 years old, you’d have to invest $11 a day to achieve a similar outcome as investing only $1 a day from day one.

Beyond the benefits of time and compounded earnings, opening an investing account for children offers other distinct economic benefits for parents and children.

1. Tax Benefits When You Open a Savings Account for Kids

There are several specific tax advantages for opening a high-interest savings account for kids.

For your child, any earnings from their personal accounts (even when you, as the parent or legal guardian, are a joint account holder) are taxed to the child. In almost all cases, children sit at a much lower tax bracket in the IRS’s eyes, thus reducing the tax burden compared to investing in your name as an adult.

For you, depositing money into your children’s regular savings accounts may help you to avoid triggering a gift tax. And for both of you, money deposited into children’s long-term savings accounts is often shielded from estate tax.

Keep in mind that tax laws vary from state to state, and specific regulations are different depending on your family’s personal circumstances and financial situation. For example, a state-administered 529 college savings plan can add additional tax benefits should you choose to invest into such accounts for future school and educational expenses.

2. Financial Education at a Young Age for Children

According to a nationwide poll conducted by IPSOS, most teenagers would give themselves a passing or failing grade regarding key financial literacy indicators like budgeting, money management, and understanding their savings.

Financial literacy and education are fundamental to your children’s long-term success. The skills they learn today will serve them well in the future, and lack of training can lead to financial struggles, overspending, inadequate saving, and other pitfalls when they’re adults.

Set your children up for success by using a savings account to show them financial literacy skills tangibly:

You can show them how to deposit money from birthdays, allowances, etc., into their accounts.
You can provide monthly updates to see how their money is “growing” over time.
You can use the accounts as a great way to discuss the cost of things they want and help them to create a habit of prioritizing saving.
You can introduce the concept of budgeting for the big or small things in life that they want.

3. Streamline Your Savings for Future Education Needs

While many traditional banks and credit unions are still far behind on this trend, a growing number of online banks and mobile app-driving financial institutions make saving for your child’s future easy, streamlined, and automated.

Things to Consider Before You Open a Savings Account for Kids

While an investment or high-interest savings account for kids has numerous advantages, there are still a few things to consider and watch for when learning how to open a kid’s savings account.

1. Age Limit

Every financial institution is different, and how they define a “minor” or a “child” varies. Sometimes, a bank will only let someone have a children’s investment account when they’re under the age of majority in their local state of residence (ages 18 or 21, depending on your state).

Other banks provide more flexibility or set the age limit for a children’s account even lower than the age of the majority.

2. Spending Limit and Minimum Balances

Because children are still learning to understand their finances, giving them free reign is unwise. Most, if not all, banks will either have built-in limits on spending and withdrawals, or they’ll let a parent or legal guardian set specific limits for each child.

Check with the bank to ensure these spending and withdrawal limits meet your needs and expectations. You’ll also want to check if those limits apply to you as the legal guardian or parent. For instance, if you’re saving up for your child’s first car purchase, you must ensure the bank doesn’t have a low daily spending limit of $100.

Similarly, ask about minimum balances. A minimum balance requirement is common for adult banking, and it’s also occasionally seen in savings and investment services aimed at minors. Because your child likely isn’t investing or saving at a very high rate, the best savings accounts for kids have no minimum balance.

3. What Name You Open a Savings Account For Your Kids Under

All minors cannot open a bank account or investment account only in their name. After all, they don’t have legal signing authority until they reach the majority age in their state of residence.

Thus, a parent or legal guardian must cosign the banking agreement and become a joint owner (also known as a custodian).

The parent or guardian who appears on the account with your child should be someone:

Who is taking a leading role in the child’s finances
Is comfortable making all financial decisions related to the child and the child’s account
Is confident in their own ability to navigate the financial world (and if you aren’t, don’t worry. The best services provide financial learning features and tools to guide you when you’re unsure of what you should do)

Once your child hits the age of majority in your area, the savings or investment account will convert to an adult account and become theirs fully.

4. Monthly Maintenance Fees

Some banks and investment institutions charge exorbitant monthly fees and maintenance fees for savings accounts for kids. Because your child doesn’t have the cash equity that an adult has, these fees can eat up a disproportionate amount of their deposits and investment earnings.