How to Find the Best Savings Accounts for Your Kids

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Kids are never too young to start learning about money. A simple piggy bank can be a great jumping-off point for little ones, but older children may benefit more from having their own savings account. Consider it training wheels before they start managing money in their teen years and into adulthood. This type of account can be an ideal holding place for cash gifts and allowance earnings. Beyond that, kids can monitor their balance and learn about budgeting along the way.

Setting up a savings account for your child can be a useful tool for teaching them healthy financial habits. Here's a rundown of how they work and where to open one.

Documents Needed to Open a Savings Account for Your Child

Opening a savings account for a kid is a fairly straightforward process, though the documents you'll need may vary depending on the financial institution. You'll likely need to provide a Social Security number and date of birth for yourself and your child, along with other basic identifying information like your address and contact information. Other rules might also apply. Wells Fargo, for instance, requires that the adult opening the account be a Wells Fargo customer who's had an account for at least 60 days.

It's important to note that the adult will share account ownership with the minor, who will likely have full access to the funds in the account. If you prefer to safeguard your child's money, a custodial account may be a better option. This kind of account is in the child's name but fully managed by an adult until the minor comes of age. Just know that annual contributions may be capped at $15,000 per child, due to gift-tax laws.

Unlike savings accounts, a custodial account can also be structured as an investment account. That means it can encompass stocks, bonds and more. This creates an opportunity to grow your child's money faster over time, though it also introduces the risk of losing money.

What Is the Best Type of Savings Account for a Child?

Comparing different account features can help you find the best savings account for your child. Many are free of monthly service fees, which is always a plus. Another important detail to know is whether you'll have to make a minimum opening deposit. Financial institutions like Bank of America and PNC Bank require a $25 initial deposit. Meanwhile, Alliant Credit Union will cover its $5 initial deposit for free. It's also wise to compare transaction limits. There may be caps on how many free withdrawals and transfers you can make in a given month.

Interest rates are another important feature. The higher the rate, the more of a yield from interest your child's money can earn. The average rate for a savings account was 0.06% as of September 20, 2021, according to the FDIC, but online banks tend to be more competitive than brick-and-mortar banks and credit unions. For instance, BECU's Early Saver account offers 2.02% for balances up to $500.

Beyond the dollars and cents of potential interest payouts, see what other perks may be available. If the bank has a robust mobile app, it could make it easier for your child to learn how to manage the account themselves. Others may feature additional financial wellness tools. For example, Capital One has a savings goal component so that kids can better visualize their progress.

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Are Children's Savings Accounts Tax-Free?

Just like adults, children may be taxed on interest earned in a savings account. It really all comes down to how much money is earned, however. Per IRS rules, if a child has more than $2,200 of unearned income, that money will be taxed at their parent's tax rate or their own—whichever is higher. Parents may also opt to report their child's interest on their own tax return, though this could result in a higher tax liability.

How to Teach Your Kids About Money

A child having a savings account of their own can be a great way for them to get hands-on lessons in financial health. Think of it as a starting point for responsible money management. Here are some other simple ways to teach your kids about finances:

  • Show them how to build and stick to a realistic budget. This is one that makes room for paying bills, having fun and saving for the future. You can use their savings account to reinforce these ideas. Apps like BusyKid and Greenlight can provide a fun and easy way to track earnings and set their spending.
  • Model healthy spending habits. Kids tend to soak up the behaviors their parents demonstrate like little sponges. If your children see you following a budget and avoiding impulse purchases, they'll be more likely to follow suit.
  • Allow your kids to earn money in an age-appropriate way. Allowance earned by doing household chores can be a powerful motivator. Teens can also look for an after-school job.
  • Teach your kids the difference between debit and credit. You want them to understand that in the real world, borrowing money usually isn't free. It's also an opportunity to discuss patience versus instant gratification. If there's something they really want to buy, saving for it gradually will cost them less than charging it and paying interest.

The Bottom Line

Financial literacy is something that starts at home. A kids savings account is one tool that can help your child build a strong financial foundation. Looking for other simple ways to teach your children about money? Experian's resource center is loaded with handy tips and tricks for parents.