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3 types of savings accounts you could open for your child

·5 min read
 / Credit: / Getty Images
/ Credit: / Getty Images

Opening a savings account for your children can be a great way to prepare for the future costs of higher education, buying a car and other expenses they may face as they get older.

These accounts can also help teach your child valuable money management skills and build a foundation of healthy financial habits for life.

There's no hard-and-fast age for opening a savings account, though experts generally recommend opening a savings account for your child sooner than later.

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"It's never too early to open a savings account for your child, but if they already have an allowance or are accumulating funds, it's time to," said Ksenia Yudina, founder and CEO of UNest, which offers investment accounts for families. "The earlier you open an account for your child, the better because it provides adequate time for the money to grow."

Types of savings accounts for kids

There are several types of accounts you might consider opening for your child. There is the traditional savings account, of course, which allows them to earn interest over time, and there are investment and education-focused accounts, too.

It's worth noting: You can't open a savings account solely in your young child's name. You'll need a custodial account, an account that you control for the benefit of a minor. In order to establish the joint account, you will need your child's Social Security number and birth date, among other items. Your financial institution should provide you with a checklist – or you can find one online. Once your child reaches the age of 18 (or 25 in some states), you can transfer the account to their name, so they can begin managing the account on their own.

If you're considering opening a savings account for your kids, here are some options.

Traditional savings account

With a traditional bank account, which you'll get through a bank or credit union, you'll deposit money into the account and your balance will accrue interest on a daily or monthly basis.

The exact amount of interest an account can earn depends on the interest rate it comes with. According to the Federal Deposit Insurance Corporation (FDIC), the average rate on a savings account was 0.8% in July 2022. Some banks may offer higher rates than these — often online banks with lower overhead costs.

If you want to maximize the interest your child earns, it's important to shop around for your savings account. You may also want to consider additional services the bank offers.

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"Finding the right youth account is key. Looking for a financial institution that promotes strong financial habits will clear up the financial wilderness for your child," said Tim Walley, education program supervisor at iQ Credit Union, which gives kids "education boxes" that can help them better understand financial basics. Their "Adventurers" account – designed for older kids – even comes with a rewards-based app called Cash Camp.

UTMA/UGMA account

Uniform Transfer to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are custodial investment accounts for children under 18. With these, you can add funds and then invest that money in stocks, bonds, mutual funds and more, potentially growing the balance even more in the long run.

"If you want to take advantage of the stock market, which can be a great hedge against inflation, a UTMA is a great option," Yudina noted.

Just keep in mind the risk that stocks and other investments may come with. If you choose this type of account, you may want to consult an investment pro along the way.

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A 529 account is for educational purposes only. The exact specifics of these vary by state, but generally speaking, they work much like investment accounts. You deposit money into your child's account, and as the underlying investments of your 529 plan grow, so do your account balances. Contributions to 529 plans are usually tax-deductible, and as long as you use the funds for qualifying educational expenses, there are no taxes on withdrawal either.

The catch is that, unlike a savings account, your child won't be able to withdraw funds for any purpose – just certain educational ones. If they do try to use the money for unrelated expenses, they'll face state and federal income taxes and a 10% penalty on whatever amount they take out, according to Investor.gov.

Because of these limitations, Walley said he "would keep a general savings for a child in addition to the 529."

How to help your kids save

Once you have a savings account set up, it's time to help your child kickstart their savings. Experts say setting goals – some short-term, some with a longer view – is a great place to start.

"I recommend beginning focusing on a smaller, immediate goal like a toy, and build up to larger goals over time, such as saving for summer camp or college," Gina Grippo-Martinez, a financial advisor at Aline Wealth, suggested. "Younger children can understand saving for shorter time periods — such as 'by the end of the week' – and gradually, they understand longer timeframes like months and years."

You can also offer an allowance or pay them for chores around the house. You can even establish a matching policy to encourage participation. For example, for every $5 they save, you contribute $1. This can help them feel more motivated, especially as they start to see their balance grow.