Kids Savings Account vs. Custodial Accounts

Although no two parents are exactly the same, most have the same overarching goal for their children: that they grow up healthy and happy, and hopefully, financially stable. One of the ways to accomplish this seemingly grand task on the financial front is to start saving early for a child and do so with some level of consistency over time.

Several different options exist for putting some money away for a kid, whether it is earmarked for college, a future down payment on a home, or a kind of launching fund for whatever life throws their way as an adult.

Both kid savings accounts and custodial accounts allow for easy saving for a child, but these two accounts types have distinct differences parents, grandparents, aunt, uncles, and other relatives or friends should recognize.

Let’s break down kids savings accounts and custodial accounts so you can make an informed decision for your child’s financial needs.

Breaking Down ‘Kids Savings Accounts’

A savings account for a child works in the same manner as a savings account for an adult. Through an online or brick-and-mortar bank or credit union, a parent or grandparent can establish a savings account for a child and deposit as much or as little into the account as they want or need.

Savings accounts for children simply require an adult to complete the application and provide some basic information about the child who is the minor account owner. This typically includes details such as the child’s name, date of birth, and social security number.

Just like with adult savings accounts, kids savings accounts earn interest on the money deposited into the account based on current interest rates.

Most traditional banks and credit unions pay a fraction of a percent for interest each year, while online or high-yield savings accounts for kids may pay 10 to 20 times more in interest.

If the plan is to keep the funds in the account for an extended period, a higher yield is likely worth it in the long run. There are typically no restrictions on how much can be added to a child’s savings account, although you may be limited to how many transfers out of the account can take place each month.

How ‘Custodial Accounts’ for Kids Differ

Custodial accounts are also an option for savings for a child’s future, but these differ from conventional savings accounts in a few ways. First, a custodial account lists a custodian such as a parent or a grandparent as the owner of the account, and the child as the beneficial owner.

When the child turns the age of majority (typically 18 or 21 years old, depending on where you live), the account is meant to be transferred into their sole ownership. Until that time, however, the custodian controls how much is put into the account and what happens to the money once it is deposited.

Unlike a savings account for a child, a custodial account may provide more options for investing funds for the future.

While a custodial account can be a savings account and earn a fixed or variable interest rate, parents or grandparents may also purchase securities inside the account. Securities may include stocks, bonds, certificates of deposit, money market accounts, mutual funds, or index funds.

Highly speculative investments aren’t allowed, but the wider breadth of options makes custodial accounts attractive for some.

UTMA vs. UGMA Accounts

Custodial accounts come in two primary forms: Uniform Transfer to Minors Act account (UTMA) and Uniform Gift to Minors Act account (UGMA).

a. Uniform Transfer to Minors Act (UTMA) Account

With a UTMA, parents or grandparents can transfer an unlimited amount of money into an account, but the funds must be used for the child’s benefit.

b. Uniform Gift to Minors Act (UGMA) Account

A UGMA account works similarly to UTMA, but assets in the account are limited to financial assets, including investments. UTMAs, on the other hand, can hold virtually any type of asset, including real estate.

In either case, the funds must be used for the child’s benefit, and, in most cases, they cannot be revoked in the future.

Which Savings Account Option Should You Choose?

If you’re looking for a simple, safe way to set aside some money for a child, a traditional kids savings account is likely your best option. However, try to find an account that offers a higher yield when possible.

For those who prefer to invest their child’s savings, a custodial account may be a better choice. Although the potential to earn more is present with investments in custodial accounts, the risk of losing money is also quite real.

Be sure to weigh these pros and cons, along with any fees associated with either type of account, before saving for your child’s future.