How to open and use savings accounts for kids
The lessons your child learns could be a real financial confidence builder
Read, 4 minutes
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, 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 check out 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:
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 are similar to the ones adults have, but usually offer lower minimum balances and inexpensive maintenance fees. You and your child will have joint ownership of the account. You’ll be able to monitor account activity as well as make withdrawals and deposits.
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.
Quick 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.
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 tax benefits on investment income. At the same time, they can reduce a child’s eligibility for need-based federal financial aid for college. And contributions to the account over a certain amount might result in you paying a 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.
Did you know?
The “kiddie tax” provides a tax break on a child’s investment income up to a certain amount, which changes every year. For the 2023 tax year, it’s $2,500. Any investment income beyond that threshold is taxed at the parent’s rate. Learn more from the IRS.
A 529 education savings plan can be a great way to start planning for your child's future education expenses. It’s a tax-advantaged account that helps you invest early to make college more affordable in the future.
529 plans generally offer a mix of investment options, in addition to convenient ways to contribute funds. Contributions grow free from federal, and possibly state, taxes. You may also be eligible for a state tax deduction for contributions made to your home state’s 529 plan.
Withdrawals are not taxed by the federal government and may not be taxed by your state when they are 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.1
If you use withdrawals for nonqualified 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 savings plans compare
| | Youth savings account | Custodial savings account | 529 college plan |
|---|---|---|---|
| Who owns it? | |||
| Who owns it? | Parent and child jointly | Parents as custodian; funds belong to child | Parent or another adult; child is beneficiary |
| Who controls it? | |||
| Who controls it? | Parent and child jointly | Parent until the child is an adult | Adult account owner |
| Limits on use? | |||
| Limits on use? | Parent may limit child’s access | Must directly benefit the child | Use for education to avoid taxes |
| What about taxes? | |||
| What about taxes? | Interest income is taxable | Investment income is taxable | Withdrawals tax-free when used to pay for qualified higher education expenses |
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:
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.
- To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a Section 529 account, such withdrawal must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half-time for room and board to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You can also take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an elementary or secondary public, private or religious school. Qualified higher education expenses now include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the designated beneficiary or sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count towards the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school, apprenticeship expenses, and payment of qualified education loans.
