Do you have a son or daughter? Do you want to set up a savings account for them? You can help your children get set up for the future by having them develop those good financial habits early on. In this article, I’m going to answer three questions related to the best savings account for kids. The first question is: should you create a savings account for your child? The second question is: where can you find the best savings account for kids? The third question is: what are the tax implications if you set up that savings account?
So let’s get right down to it.
Should you create a kids saving account?
When I was growing up, my Mom opened a kids savings account for me when I was in elementary school. It was very exciting. I had this passbook where I would see the deposits that I had made. I would see the interest I was earning. (I’m probably revealing my age because I’m referring to a passbook, which you probably are not familiar with. A passbook looks like a passport and it used to record all the transactions that you’ve made in your bank account). Who knows, maybe that was instrumental in shaping the financial planner that I am today.
I personally think that having a savings account for your child is one of those things that you can teach them early on. Good money habits are very important!
What is the best savings account for kids?
Let’s turn to Google. After a quick search, I found an article at NerdWallet about the best child savings account. It lists four different banks. Let’s take a close look.
1. Capital One Kids Savings Account. The rate is pretty competitive. It’s not going to be super high given rates are low these days but it’ll be better than a checking account. I have a Capital One account, and it’s easy to make online transactions. There is no monthly fee and there is no minimum maintaining balance. This looks like a great option.
2. Alliant Credit Union Kids Savings Account. It looks like the rate is also pretty competitive. It may have a small minimum balance requirement. One of the downsides that I see here is because it’s a credit union, you have to be a member of this credit union. So you’ll have to do a little bit of research on what it takes to become a member.
3. Bank of America Minor Savings Account. When I looked at the rate, it seems quite low. It’s almost like a checking account. I’m not exactly sure why NerdWallet even listed it here.
4. BECU Early Savers Account. BECU stands for the Boeing Employees Credit Union. They have very competitive rates but the downside is that you have to live or work in Washington State.
So these are the four options that were listed in this article about the best savings account for kids. You can choose based on this information.
So let’s say you’ve decided on a financial institution in which you’re going to open a kids saving account. The next question you might think of is…
What are the tax implications of opening a kids saving account?
Does your child need to pay taxes on the interest income they are going to make? Do you need to pay taxes on that? The last thing you would want is to have your child owe back taxes for several years, right?
Upon looking closely at the IRS website, it looks like if the child’s interest income is $2,200 or less, then it is not subject to taxes. Keep in mind though, these are kids’ savings accounts, and a child below 18 years old, as a minor, cannot legally own an account. As a parent, you will need to be a co-owner of this account. Once she becomes of age, then you can remove yourself from this account.
How to open a bank account for a minor
Minors cannot open a bank account on their own. First, you need to fill out the paperwork for opening an account and you must list the minor as the primary account holder and yourself as the joint account holder. You will typically need your driver’s license, social security number, your child’s social security number, your child’s birth certificate, and proof of address. This will change depending on the bank that you decide on, so it’s best to contact them first so that you can get all of the documents together before you open a bank account.
Now, you might also be thinking about saving for your child’s education. College is expensive, and it’s best to start saving early. Should you save for your child’s college education through this savings account that you’re about to open or should it be through a 529 plan or should it be through a Roth IRA? For the answers, check out our video on the Pros and Cons of a 529 College Savings Plan.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.