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 that 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.
Investment 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, and given years to grow, will far outperform a much larger investment made years down the road. Your child has many decades in front of him or her, 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’s pretty difficult 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 eyes, thus reducing the tax burden compared to if you were 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. UNest tax-advantaged investment account for kids being a prominent example of them.
Many parents and caretakers feel overwhelmed by the concept of saving for their children’s future. Forward-thinking investment services and banks, such as UNest, take away the guesswork by:
- Letting you set specific saving goals, including specific spending needs and the dates you need this money.
- Helping you select specific investment plans and accounts that best meet you and your child’s financial goals.
- Automating the investment process through a simple automated process (in UNest’s case, automatic deposits starting at only $25 a month) so your child’s savings grow without you needing to do anything.
Investment Account for Kids
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. In some cases, 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 how to understand their finances, it’s unwise to give them free reign. 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 individual 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 would need to 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 are not allowed to open a bank account or investment account only in their name. After all, they don’t have legal signing authority until they hit the age of majority in their state of residence.
Thus, a parent or legal guardian will need to 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 his or her 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. 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.
The best financial option for your child is either a no-fee or low-fee account. For instance, UNest’s investment account for kids only charges $3 a month per child, which is significantly lower than the average fees seen in the investment industry.
5. Financial Learning Features
Don’t let these powerful teaching moments go to waste. Ask the financial institution what learning tools are provided to you and your child.
For example, at UNest, parents, and children get access to:
- Easy-to-understand dashboards that make visualizing your child’s savings and earnings easy to see and grasp.
- Financial advisor-led training and education.
- Calculators to plan for your child’s future easy to break down into regular savings goals.
UNest: Tax-Advantaged Investment Account for Kids
UNest gives you total control of your savings through their tax-advantaged investment account for kids. Best of all, UNest’s unique model lets you begin with a monthly investment of as little as $25 and only costs $3 a month, as well as all of the advantages outlined above.
You can sign up for one kid or upgrade to a family plan to include up to five kids on your account. And conveniently manage your account, investments, and savings from the convenient and easy-to-use mobile app to make saving money for your children’s future easy and straightforward.