Should I Open a Savings Account for My Kids?

Before opening a savings account, think about why you and your child are saving money. Here are some common reasons

  1. Pay for future education expenses
  2. Help your child manage the money they make from their job
  3. Give your child a lump sum of money when they graduate from high school

Your reason for saving the money will help you decide where to save the money. There are three main options that may be a good fit for you

529 College Savings Account

If you’re saving money for educational expenses, consider an education savings account, like a 529 plan. A 529 is a savings account specifically for educational expenses. You can invest the money you put into a 529 plan. If you use the money for a qualified educational cost, then all of the money is typically tax-free. Depending on the state you live in, the amount you put into the 529 plan may be state tax-deductible. You also maintain control over the account.

Benefits of a 529 Account

  • The money gets special tax treatment by the IRS
  • 529 plans owned by custodial parents generally don’t heavily impact your child’s financial aid eligibility

Downsides of a 529 Account

  • You are limited to using the funds for education-related expenses
  • You are limited in what you can invest inside a 529 plan

If you want the flexibility to use the money for anything, then a savings account may be a better fit.

Joint Bank Account with Your Child

These accounts typically require you to open the account with your kids. Both you and your child will own the account. This option gives you the ability to manage the account until your child is mature enough to handle the account alone. Your child can use the funds in the account generally at any time for any reason. A joint account may be an option for a parent with a working child who wants to both save and spend the money in the account.

Benefits of a Joint Bank Account

  • Joint ownership so you can manage the account
  • The child has access to the account

Downsides of a Joint Bank Account

  • You’re responsible for what your child does in the account
  • Possible financial aid eligibility impact

UTMA/UGMA Custodial Accounts

The Uniform Transfers To Minors Act (UTMA) allows you to put more assets into the account, like real estate. The Uniform Gifts to Minors Act (UGMA) limits what you can put into the account to mostly cash and investments like stocks and bonds. The account is managed by an adult on behalf of a minor. The minor doesn’t have access to the account until they are an adult. UTMA/UGMA may be a consideration if you want to save (or invest) money to give to your child once they are an adult.

Benefits of a UTMA/UGMA Custodial Account

  • Lots of investment options
  • Can use the money for any purpose

Downsides of a UTMA/UGMA Custodial Account

  • At a certain age (can vary by state), the money belongs to the child
  • Possible financial aid impact

To recap, before opening an account to save money for your child, decide the purpose of the savings. The purpose of the savings will help you decide what option is best for you and your child.