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How to choose the best savings account for your kid

It's never too early to start teaching your child healthy financial habits. One easy way is to open a savings account for your child. Teaching your little one the value of a dollar and how to manage even small amounts of money properly are valuable personal finance lessons.

Savings accounts can be a valuable tool in learning to set savings goals, track progress toward important money goals, and learn about the power of compound interest. Here are some things to remember when looking for the best savings accounts for kids.

What is a children's savings account?

A children's savings account is a type of savings account geared toward savers under age 18. Kids savings accounts fall into one of two categories:

  • Joint account: A joint account is a savings account owned and managed by both the child and parent. This means that the parent and child have equal access to the account and can make deposits, withdrawals, and more.

  • Custodial account: A custodial account is a savings account you manage for your child. In this case, your child is a beneficiary until they take ownership of their account once they become an adult.

With joint and custodial accounts, many banks and credit unions offer savers the option to transition to a regular savings account once they become adults.

One of the significant perks of starting early and opting for one of these account types is that you can teach your child about money management. Once your kids learn to save, they can transition to more complex financial products as adults, like managing a credit card, using a checking account, or saving money in a money market account.

Where to open an account for your child

There are several types of savings accounts you can choose for your child. The right choice will ultimately depend on the kind of banking experience you want, if you wish to stick with your current financial institution, and the perks you value.

  • A basic savings account at your bank: Most banks offer a traditional savings account, a standard deposit account in which you can put money and earn interest on your balance. The annual percentage yield (APY) you can expect to earn on that balance will vary from bank to bank.

  • A savings account with your credit union: Credit unions differ from traditional banks because they are not-for-profit institutions. These financial institutions are run by members and for members. As such, you (or a family member) will likely need to be a member of a credit union to open a savings account for your child. The upside: because these institutions are run by members, you'll likely pay lower or zero extra fees to run and maintain your account. Although, you should be aware that credit unions may have fewer physical branches compared to a larger bank, as well as a smaller ATM network. Credit unions may also charge a membership fee for banking with them.

  • An online-only savings account: Anyone can apply for an online-only bank account right from their laptop or smartphone. One major perk of an online savings account is lower fees thanks to no overhead costs for brick-and-mortar locations, which can also mean higher interest rates. Like credit unions, an online-only savings account may not have an extensive ATM network, or any ATM network. You'll also want to ask whether your account will come with a physical ATM or debit card.

No matter which type of institution you choose to bank with, you must confirm its membership with the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). You might see this designation at the end of the institution's name as "member FDIC" or "member NCUA." Still, you should confirm with the official websites via the FDIC's BankFind tool or the NCUA's credit union research tool.

When your deposit account is FDIC- or NCUA-insured, your deposits are federally insured up to $250,000 per depositor or credit union member, per ownership category. This way, if your bank fails, your money is protected.

How to find the best savings account for kids

Not all savings accounts are the same. You should consider several details when choosing a starter savings account for your child.

What's required to open and maintain your savings account?

When you open a new savings account, pay attention to the fine print. Your bank or credit union may have specific requirements in order to open an account. You might be required to make a minimum opening deposit, maintain a minimum balance in your account to keep it open or pay a recurring fee for account maintenance and services.

There may also be stipulations about the minimum age necessary to open an account.

Are there any fees associated with this savings account?

In many cases, savings accounts designed for kids don't usually charge additional fees. However, you should still ask your financial institution if there are any monthly maintenance fees or penalties you should be aware of. This could also be a good lesson for your child in understanding the terms and conditions of their accounts before agreeing to them.

Kids accounts usually don't charge monthly fees, but it's still good to watch for any potential charges.

Capital One, for example, offers a Kids Savings Account that doesn't charge any monthly or maintenance fees and doesn't require a minimum balance.

Is it an interest-bearing account?

Selecting an account that earns a high interest rate will help your child’s savings grow faster and teach them that it pays to save. Showing them how much they can earn over time may incentivize them to set aside more money now.

If you go with a high-yield savings account, your child's savings can grow exponentially over time — even with a smaller balance.

For example, Alliant Credit Union's Kids Savings Account is currently offering a 3.10% APY, which is more than seven times the national average.

What kinds of parental controls come with this savings account?

Your financial institution will recognize that your child needs hand-holding as they navigate their first savings account. As such, you might find that your child's savings account comes with specific parental controls built in.

When selecting an account, read up on the settings and features of that account to determine if it's the right fit for you and your child. Many accounts come with a debit card or prepaid card that your child can use to make withdrawals or pay for items on their own.

Certain bank accounts will give you the option to set withdrawal limits on your child's account or add a certain limit to a prepaid debit card so that they aren't regularly dipping into their savings. You may also be able to set up text alerts to stay up to date on your child's savings account balance and transactions.

Does this account come with any extra features or mobile app capabilities?

The goal of a starter savings account is ultimately to give your child a strong foundation and guide them so that they can manage their personal finances down the line.

Many financial products geared toward younger consumers offer financial literacy and budgeting tools online or within your banking app. Giving your child access to their account via a mobile app and showing them how to monitor their balance, and deposit their allowance or a birthday check is one way to give them an added layer of financial independence and allow them to start taking ownership of their personal finances.

Opening a savings account for your child

Creating a new savings account for your child is a simple process. If you're already a customer and plan to open a savings account with your current bank or credit union, you should be able to do so fairly easily.

Remember, you'll need to be a co-owner of the account, so you'll need to provide both your information and your child's information if you aren't already banking with that particular bank or credit union.

Some key information your financial institution will ask you for includes some form of personal identification for your child, such as:

  • Birth certificate

  • Social security card

  • Driver's license or state ID (if your child is a teen or old enough to drive)

  • Passport

Make sure your account grows with your child

The best savings account will be the one that grows with your child over time. In most cases, your bank or credit union will transition your child's savings account into a regular savings account that they can then have sole ownership of and manage on their own once they reach age 18.

Some banks may even offer account options that you can switch to before then that cater to teens or college students. Ask your financial institution about the options they offer for a longer-term account, once your child is of age.

A kids savings account can serve as a building block in your child's lifelong journey with their personal finances. When teaching your child about money management, part of teaching they how to manage their money involves having important conversations about where they keep their money and how carefully choosing an account can make all the difference as they work to reach their money goals.