Best Options for Your Child’s First Bank Account

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Updated on Wednesday, August 26, 2015

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Getting your child started on the road to saving money early on is never a bad idea. You don’t necessarily need to open a checking account for them right away, but having a savings account in his or her name can be extremely beneficial. Your child will have a place to store any money he or she receives on birthdays, holidays, and graduations. Plus, you’ll be able to teach him or her the value of having that money when your child asks for you to buy something.

If you want to get an idea of what types of bank accounts to look for, along with which ones to consider, read on.

Custodial Accounts for Young Children Explained

Have you been considering gifting your children money instead of opening a savings account? Opening a custodial account for them may be an option you want to consider. It’s important to know what this entails as there are legal and tax implications involved.

Custodial accounts are often referred to as Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts. Most parents or guardians open these accounts for their children for the purpose of gifting them tax-exempt money.

First, be aware that any money transferred into a custodial account is legally your child’s. While you function as the manager of the account, the money is not yours to spend. The money in the account can only be used for the benefit of your child. If you put money into a custodial account, it should be earmarked for your child to use. You can’t “take it back” later.

When your child is no longer considered to be a minor based on state law, he or she has complete access to the money and become the legal owner of the account. This means he or she can choose to use the funds as they wish. If you’re gifting money to your child in this account for education, your child can decide to use it to buy a new car or travel around the world. If you think you might have a problem with this, consider using a 529 Plan instead.

If the goal is to save money for your child’s education, keep in mind that any funds accumulated in a custodial account will negatively impact the amount your child is qualified to receive in financial aid. The funds directly count as an asset for your child.

Lastly, there are tax consequences when opening a custodial account, and they affect your child as they’ll be the ones responsible for paying it (under Kiddie Tax rules). Because custodial accounts have an investment component to them, your child will have to pay tax on any income generated. If you have a financial advisor, it’s recommended you talk to them to get a good idea of how to manage the account.

What to Look For in a Savings Account for Your Child

Are you only looking to open a simple savings account for your child? They’re probably not going to be using it heavily. For this reason, it’s smart to choose a savings account that has no fees and no minimums. It should be very low-maintenance and shouldn’t cost you anything to maintain. You just want a simple account that holds your child’s money.

Of course, you should still choose a savings account with a decent APY. If the money is going to be held there for years, it might as well earn something! Most traditional banks offer pitiful APY’s – some close to 0.01%. Online-only banks tend to offer higher APY’s around the 0.60% – 0.90% range.

Online Banks Are Good Solutions

As you might be able to tell, online banks are great no-fee solutions, and they generally have fewer requirements than brick-and-mortar banks. Ally is a good online bank to look into.

  • Ally offers a competitive APY, doesn’t have a minimum deposit to open the account, there aren’t any monthly maintenance fees to worry about, and it has 24/7 customer service.

While you may hesitate at the thought of using an online bank, your child is likely a pro at navigating the Internet. Banking is more mobile than ever, and your kid won’t be bothered by the lack of interaction with a bank teller. In fact, he or she will probably be thankful for the convenience it offers.

It’s convenient for you as well because you can simply deposit checks using a mobile app. It’s a great hands-off way to ensure your child is working toward a healthy financial future.

Some Internet-only banks don’t offer custodial accounts, so you want to check to see if you can open one first. Thankfully, most online banks have chat features so you can get answers to your questions quickly.

Check Into Local Credit Unions

Don’t think online-only banks are right for you or your child? You can always look into local credit unions. Some actually offer incentives for your child to save their money, which is great if you’re trying to teach them the importance of saving and managing their money.

Abilene Teachers Federal Credit Union is a fantastic example of this. It has a “Savings Safari Children’s Account,” and for every $5 saved, children receive a “Safari Buck” they can redeem for certain rewards.

This allows children to associate saving money with a fun event, which will only help motivate them to save more later on in life.

Checking Accounts for When They’re Older

Have a teenager, or just want to prepare ahead of time? Getting your child ready for their first job with a checking account is essential, as direct deposit is much better than having to go to the bank to cash a check every week. The following accounts are good for those 18 years and older:

  • Bluebird, by Amex: There are virtually no fees associated with this checking account, and you can send money to your child easily, making it a great option for those with kids going away to college.
  • Ally: Like its savings account, the checking account has no monthly maintenance fees, no minimum balance to open, and gives you access to 24/7 customer service. You can also send money to your child via Popmoney, and there are no fees incurred when transferring money to a non-Ally account. It also offers overdraft protection and a $10 ATM reimbursement.
  • Charles Schwab: There are no monthly maintenance fees, no minimum balance, and no ATM fees with this checking account. That’s right – you’ll be reimbursed for any ATM fees you incur. Charles Schwab also offers overdraft protection. Plus, if you want to introduce your child to investing a bit further, a Schwab One brokerage account comes free when you open a checking account. There are no fees to maintain it.

Open Your Child’s First Bank Account Today

Opening a savings account for your child is the first step toward teaching them the value of money. As a parent, you want to provide your child with the best tools and resources they can use to succeed, and a savings account is absolutely essential. There are far too many young adults out there without savings or checking accounts that don’t know how to manage their money – don’t let your child be one of them.