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Looking to help your child learn life skills like money management? Opening a certificate of deposit (CD) can teach children about saving, interest rates and more. You can open a CD for your child by using a custodial account, choosing the right CD for their needs and making an initial deposit.
A CD is a deposit account that earns interest for a set term. Common terms range from one month to five years; typically, longer terms mean higher interest rates. At the end of the term, you can either withdraw your initial deposit (plus interest) or renew the CD. Most CDs charge penalties for withdrawing money before the CD reaches maturity.
Can You Open a CD for a Child?
Minor children can't legally buy CDs, but you can open a CD for a child using a custodial account. This account is owned by your child, but you manage it until your child comes of age.
Since CDs typically earn higher annual percentage yields (APYs) than standard saving accounts, opening a CD can help your child's savings grow faster. You might also purchase a CD to give to your child or provide a head start on paying for a first car, wedding or other big goal.
Find High-Yield CDs
How to Give a CD to a Minor
- Consider your budget. Unlike a regular savings account, you typically can't add money to a CD. You deposit a lump sum to open the account, and it's held until maturity. Many CDs require a minimum opening deposit of $500 to $2,500 or more. Choose an account whose deposit requirements are realistic for your budget or a CD with no minimum deposit amount.
- Understand your options. CDs come in many variations. Regular CDs typically have a set term, a fixed APY and early withdrawal penalties. High-yield CDs work the same way but boast higher APYs. As of October 2023, some high-yield CDs had APYs over 5%; in contrast, the average APY on a regular 12-month CD was 1.79%.
- Consider non-traditional CDs. Other options include bump-up CDs, which let you request a higher interest rate mid-term; step-up CDs, whose interest rates automatically increase during the term; no-penalty CDs, which let you withdraw funds early without penalties; and add-on CDs, which let you add money to the CD during its term.
- Compare interest rates, fees and terms. CDs with high APYs may have additional fees, higher minimum deposit requirements or stiffer penalties for early withdrawal. Weigh the pros and cons to find the best option.
- Complete an application. You can usually open a CD online, in person or by phone. You'll need your government-issued photo ID; Social Security numbers or Individual Tax Identification Numbers for yourself and your child; and proof of your address, such as a utility bill or mortgage statement.
- Make an opening deposit. You can generally do this in person or online. If transferring funds from another account, have your bank routing and account numbers on hand and make sure there are adequate funds for any minimum deposit requirements.
Are CDs a Good Option for a Child?
A CD can be a good investment for a child, but you should consider both the pros and cons.
Pros of CDs
- Low-risk investment: If the bank or credit union is federally insured, you generally can't lose your deposit. However, you might lose out on interest if you withdraw funds early.
- Guaranteed rate of return: Unlike savings accounts, which have variable APYs, a CD's APY is fixed, providing predictable earnings.
- Usually federally insured: CDs from banks insured by the Federal Deposit Insurance Corp. (FDIC) or credit unions insured by the National Credit Union Administration (NCUA) are federally guaranteed up to certain limits.
- Relatively high APYs: CDs generally boast higher APYs than traditional savings accounts and even some high-yield savings accounts.
Cons of CDs
- Limited liquidity: Unlike savings accounts, you can't withdraw money from a CD before maturity without paying a penalty. This limits your ability to access funds.
- May require minimum opening deposit: Some CDs' minimum initial deposit requirements may be out of reach for your or your child's budget.
- May lose out on higher returns: CDs typically earn less than riskier investments such as stocks over time. You could also lose out on potential growth if interest rates rise after your money is locked into a fixed-rate CD.
Alternatives to CDs for a Child
Depending on your goals and budget, other ways to save for your child could make more sense than CDs.
- Savings account: You can open a savings account for your child, either jointly or as a custodial account. Choosing a high-yield savings account can boost your child's savings, with some high-yield savings accounts earning as much as 10 times the yields of traditional savings accounts.
- Savings bonds: Tried-and-true gifts for children, savings bonds are safe investments that earn interest for up to 30 years. Issued by the U.S. Treasury and federally insured, savings bonds are available in amounts from $25 to $10,000 and can be held in a minor child's name.
- 529 plan: Save for your child's college tuition or other educational expenses with this tax-advantaged investment account. States and schools offer 529 plans, which are typically set up by a parent or grandparent for a child who's the beneficiary. The adult owner manages the account, even after the child is of age, and can transfer it to another beneficiary.
- Coverdell Education Savings Account (ESA): You can open a Coverdell ESA naming a child under 18 as the beneficiary to save for college or K-12 tuition. Funds used for qualifying expenses are tax-free; however, you must fall below certain income limits to open an account, and contributions are limited to $2,000 annually.
- Brokerage account: Want to build wealth for your child or educate them on investing? Open a custodial brokerage account, which they own but you manage until your child is of age. Brokerage accounts allow you to buy and sell stocks, bonds, mutual funds and other securities.
- Custodial individual retirement account (IRA): Give your child a leg up on retirement with a custodial IRA. You manage the account until your child is of age. A child must have earned income to open an IRA, but contributions can come from you or your child. Even a small sum can multiply exponentially by the time your child is ready to retire.
The Bottom Line
Opening a CD doesn't typically affect your or your child's credit score, since it doesn't involve borrowing money. Want to help your child build a credit history along with their savings? Consider adding them to your credit card as an authorized user. If the credit card company reports authorized user account activity to the major consumer credit bureaus (Experian, TransUnion and Equifax), the account shows up on your child's credit reports. Your child gets the biggest boost if you pay your bill on time and keep credit utilization to a minimum.
If your child has no credit accounts, a credit report in their name could signal child identity theft. Play it safe by checking your child's credit report. You also have the right to freeze your child's credit report, which can help prevent future fraud.