Opening a kid’s savings account is a tangible way to introduce your child to saving and budgeting concepts. It’s also a powerful way to take advantage of compounded interest and help your child benefit from their greatest financial asset: Time.
But because your child is a minor, opening a kid’s savings account comes with an additional layer of rules, regulations, and requirements, especially regarding how you withdraw from the kids’ savings account.
Before you take out money, review your children’s savings account policy and understand how you can use the money, who can withdraw money from your kids’ savings account, and what early withdrawals trigger fees or charges.
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Can You Withdraw Money from a Kid’s Savings Account?
In almost all situations, a traditional bank, credit union, or investment company will not open a kid’s savings account without the presence and signature of a parent or legal guardian. That’s because minors cannot legally consent and sign the bank’s agreements.
Therefore, as a parent or guardian, you become a joint-owner or custodian of the kids’ savings account. These are typically referred to as custodial accounts.
Who Can Withdraw Money from a Kid’s Savings Account?
Your child can, of course, access the account they jointly own with you. However, there are significant limitations on what your child can do.
As the legal adult associated with the account, most banks and institutions allow you to set specific limits or requirements on how your child uses the account. Depending on your bank, this may include:
- Allowing the minor to deposit money but not withdraw any money
- Cap the number of daily withdrawals (e.g., two withdrawals a day)
- Cap the total amount of money the minor can withdraw in a day or a transaction
- Provide or restrict how the minor accesses the account (e.g., should the child have access to online banking or only in-branch banking?)
The rules about what you can withdraw from kids’ savings account shift dramatically when it comes to the child’s parents or guardians.
If you’re the custodian, you have full signatory rights and access to the savings account. You also can review and approve all changes, deposits, withdrawals, and other account activities.
This means a custodian can:
- Manage all automated deposits
- Withdraw any or all money from the account at any time (subject to any applicable banking or investment fees and charges)
- Close the account
- Open additional accounts (e.g., opening a checking account connected to the kids’ savings account)
Remember that while you’re a joint owner, the money isn’t yours. The moment it gets deposited into a children’s long-term savings accounts, it also becomes your child’s property. Therefore, any withdrawals you make can only be withdrawn and used for things that benefit the child (e.g., school expenses, college tuition, etc.).
When you open the kids’ savings account, you can add other parents or guardians to the account, too. This may be wise if you are involved in the child’s upbringing or daily finances.
If you are the other parent or guardian and you weren’t initially added to your child’s financial accounts when they were created, you don’t have any ability to access or withdraw funds from the account.
Should the need arise, the custodian can file the correct documentation with the bank to add you to the account.
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Transferring Kid’s Savings Accounts to Children
The ownership of custodial savings accounts convert fully to the child’s complete control when they reach the age of majority in their state of residence. This varies from state to state but is typically either age 18 or 21.
During this conversion process, the account switches from a children’s savings account to an adult savings account. Because there is often a diverse range of fees and requirements associated with adult banking — minimum balances, monthly service charges or maintenance fees, etc. — it’s essential to:
- Be aware of when this conversion will take place
- Understand what type of adult savings account the custodial account will switch to
- Ensure that this account is the most appropriate one for your now-adult child’s needs (and help them choose an alternative if necessary)
Because each state is different, and every bank has its policies regarding automated conversion, be sure to check with your financial institution to find the best children’s high-interest savings accounts.
Opening a Children’s Regular Savings Account Under Your Child’s Name
Opening a savings or investment account in your child’s name has specific pros and cons.
- Compounded interest: The earlier your child starts saving or investing, the better. Time is their most significant asset, and an early start will generate a lot of passive income over their childhood.
- Fewer fees and restrictions: The best savings account for kids typically have no minimum balance requirements, no income verification requirements, low to no-fee policies, and other budgetary advantages not commonly seen in adult savings accounts.
- Tax implications: Depending on your state and your tax bracket, custodial accounts can be a strategic way to give your children money while avoiding estate and gift taxes.
- Taxes for your child: Minors typically file their taxes as part of their parent’s annual tax return. Depending on how much they earned in their savings or investment accounts, some of the interest or return that their savings generated may be taxed.
- Taxes for you: Estate and gift taxes are complex, and some parents may unwittingly surpass their state’s tax laws and trigger significant taxes if they deposit too much money into a custodial account.
- Strategy: Unless you’re working with a financial institution primarily focused on helping your child save for their future, the services and products at many traditional banks may not be beneficial for your child’s financial goals.
- Long-term responsibility: Remember that the custodial account will convert fully to the child’s ownership on their 18th or 21st birthday. Because a broad savings or investment account doesn’t have use-specific regulations the same way something like a 529 Plan account does (which is specifically limited to college and school expenses), you’ll need to trust in your child’s financial instincts and responsibilities.