What Parents Need to Know About Kids’ Savings Accounts

Grandma gives your daughter a dollar for helping her in the garden. Grandpa gives your son a quarter for every alphabet letter he recognizes. The tooth fairy leaves $5 under their pillow every time they lose a tooth. The dollars add up. Soon their piggy banks are stuffed to the tail. Now what? 

Perhaps it’s time to open a kids’ savings account – and begin teaching your kids about personal finance in the process.

Teaching your children about money management at an early age is a good reason to open a kids’ savings account for them. It can help them develop their financial sense for both the short term and the long term, and reinforce the idea of saving. 

Besides, savings accounts pay interest, which I’ve learned is pretty cool to a young child. And since getting or paying interest are major aspects of financial planning and thinking as an adult, it’s a good idea to teach them about it while they’re young. 

If you choose to open a kids’ savings account for your child, it helps to decide what goal you want your child to accomplish. Is this account meant to teach them about money and savings, or is this about putting money away for bigger things, such as college or long-term investing? If the former, read on. If the latter, consider reading more about college savings approaches and retirement accounts.

Generally, a child under the age of 18 can’t sign legal documents. Enter a parent or guardian. To open a bank account for your child, you usually have two options:

• Joint account. In a joint savings account, both you and your child under 18 have equal control over the account and the money in it. A minor with a valid form of government ID could likely make withdrawals on their own, so check with the bank representative helping you open the account about that institution’s requirements, limits, or parameters.
• Custodial account. Here, the child is the account owner but the parent/guardian maintains control and oversight. You may see these accounts referred to as UTMA or UGMA, which stand for Uniform Transfer to Minors Act and Uniform Gifts to Minors Act, respectively. The child does not have access to the money without custodial permission. Usually, when a child reaches adulthood, which can range from 18 to 21 years of age depending on the state, a custodial account will change to an individual account. A custodial account is considered an asset, so you may want to consult a tax specialist before opening it. 

Whichever children’s bank account type you choose, you’ll likely want to evaluate competing banks based on these four factors:

• Interest rate: The higher the better.
• Minimum balances: Some banks have them, some don’t, and they vary.
• Account maintenance fees: Again, some have them and others don’t.
• ATM card: These can provide your child with experience making deposits and withdrawals. 

You may also want to consider perks for signing up and the bank’s convenience to your home – unless you choose an online bank. Online banks sometimes offer higher interest rates than brick-and-mortar ones, but physical bank branches offer a child the experience of handing money to a teller, filling out a deposit or withdrawal slip, and using an ATM. These can help make their finance education feel more real, especially to a younger child. 

Some financial institutions may offer a very high annual percentage yield (APY) up to a certain amount, which then drops off to the market rate on balances above that. For example, a credit union may offer 4% on the first $1,000, and then pay around the national average rate – only 0.06% as of late-2021 – on balances above $1,000. Some institutions may offer birthday bonus deposits to children under a certain age if certain conditions are met, such as continuous monthly deposits. 

One of the deciding factors for me was a coin-sorting machine. I found two credit unions nearby offering the same rate, both close to home, both offering experiential transactions my children could perform. But only one had a coin machine. Kids acquire coins like parents acquire toys and crayons under the couch. It’s far easier to dump them into a machine than to count them out and roll them by hand. Added bonus: I’m teaching the kids about time management at the same time as I hone their money habits. 

Once you select your financial institution, you will need some forms of documentation for your child. This can vary from bank to bank, but common documentation includes birth certificate, Social Security card, or a passport. The adult opening the account must present identification as well.

One of the biggest benefits of kids’ savings accounts is that they can help teach this core lesson in financial responsibility, which I often tell my own kids: “Just because you have some money doesn’t mean you need to spend it right away.” 

Empowering children with their own savings accounts helps them understand the value of money and how not to waste it on trivial things. It can teach them to plan ahead to save for something they want and help with goal-setting. Earning money from interest helps show children how their money grows when saved or invested. Plus, it provides a real-life practical application for all the math they learn in school. 

My favorite benefit, though, is this: If the money’s in a bank earning interest, it’s not lost inside a bag inside a box under a seat cushion in your car, or stuck in a shoe under the bed.