Guide to Savings Accounts for Grandchildren and Other Kids

It’s common for parents and grandparents to want to step in and help their children or children’s children on the financial front. Sometimes this means contributing toward a college savings account, opening an investment fund, or simply establishing a bank account in the child or grandchild’s name.

Offering some type of savings to youth is beneficial in several ways, but it can be confusing to know where to begin. This guide to the why and how of savings accounts for your kid or grandkid provides the direction you need if you’re thinking about getting started with saving for them in 2024.

The Benefits of Saving for a Child or Grandchild

As a parent, grandparent, or friend, you may feel obligated or compelled to help your kids or grandchildren prosper financially, and funding savings, checking, investment or financial learning accounts can be a smart way to go about it. But the benefits of establishing a savings fund for your kids or grandkids don’t end with them. You may also secure a small tax deduction for your contributions to certain types of accounts, like college savings plans.

Additionally, gifting savings throughout your lifetime lowers your total estate, allowing more money to pass on to your beneficiaries without significant tax implications. Talking with your financial planner or estate planner can give you more insight into these additional advantages of saving for your young family member or other kid.

You also have the ability to help them learn about money. Having a bank or investment account early on in life sets the stage for financial literacy and wellness as an adult. Use the account to teach the child about how money works from an earning, spending, and budgeting perspective.

Types of Kids Savings Accounts

Setting up a savings account for a newborn baby, grandchild, child, niece, nephew, or other young loved one can take on many different forms, including the following popular options among parents and grandparents. Each has its own upsides and pitfalls, so be sure to take time to learn about how the accounts work before deciding on the right one. Here is a brief overview of kids savings account types:

a. Traditional Bank Savings Account

You can usually establish a savings account with a bank or credit union for a minor child with ease. This is the simplest kind of savings account for a kid, and it will earn a small amount of interest over time. Bank deposits are insured up to a certain amount, and you have flexibility as far as adding money as the child gets older.

There are no restrictions on what you can use the savings for, but you may be required to transfer ownership of the account to the children once they become adults. See further down in this guide for some of the best high-yield savings accounts for kids.

b. College Savings Plans

Each state offers a college savings plan, known as a 529. This type of account allows grandparents or parents to contribute on behalf of their grandchild or child, up to the annual limits set by the IRS. A 529 plan offers tax deferral while the funds are invested inside the account, and tax-free distributions, so long as the savings are used for college-related expenses. There may also be a tax deduction for contributions in some states.

However, there may be penalties involved if funds are taken out for something other than a college education, so be careful when deciding to contribute to this type of savings account.

c. Custodial Accounts

Similar to other bank accounts, grandparents, parents, and other relatives or friends can establish a custodial account for a newborn baby, young kid, teenager, or grown-up.

Custodial accounts can be invested in a certificate of deposit or a traditional savings account, and the primary adult maintains control over the funds until the child becomes an adult. There are some tax benefits in establishing a custodial account, but parents should be aware that any money contributed cannot be un-gifted at a later date.

Ready to teach your child about money management? First Checking offers financial freedom with the security of a joint checking account. No fees, plus essential life skills with this top checking account for 13-17 year-olds.

Best Online Savings Account Options for Kids

If traditional bank savings accounts seem like a good route for you, it’s helpful to know which banks offer the best features and benefits on kids accounts, and where to begin. Here are our top three high-yield savings account options for parents and grandparents to open for their children or grandchildren:

1. Alliant Credit Union – This kids savings account is offered to children 12 years old and younger. It offers an interest rate with a whopping 3.10% APY and an online experience that is simple to navigate and use. The credit union does not charge fees on the account so long as electronic statements are elected, and interest is earned when at least $100 is in the account. However, you must be a credit union member, but they make it easy for anyone to join.

2. Capital One 360 – offers an interest rate of 2.50% APY, some local branches, mobile deposit, and an easy application process completed online. There are also no fees or minimum balance requirements for a child’s savings account here, making it an easy account to fund over time. When the child turns 18 the kids savings account automatically converts to a 360 Savings account for adults.

3. CIT Bank – This company offers a high-yield savings builder account for parents and grandparents to open for children of any age with a high 1.00% APY, which is many times the national average interest rate. Simply open the account online and select “custodial” during sign-up to get started.

   The CIT Bank Savings Builder account requires an initial $100 deposit but doesn’t require a monthly maintenance fee. However, you will need to deposit at least $100 monthly or carry a balance of at least $25,000 to earn the highest interest rate. CIT Bank also offers other options with even higher annual yields, such as a money market account that can be opened for kids too.

Alternative Savings Account Option with Local Branches

Bank of America – offers an interest rate that is a fraction of the other options, but the financial institution is well-known and easily accessible through thousands of branch locations. There is no monthly fee for a BOA savings account so long as the initial minimum opening deposit of $100 is made and the child is 17 years old or younger or is 18 to 24 years old and qualifies as a student. Custodial accounts are also available.

Final Thoughts on Saving for Grandkids and Other Children

You have many options when selecting a savings account for a grandchild or other kid. Be sure to think about how you want the money to grow, either through a fixed interest rate or with potential investment earnings, and what you want the money to be used for in the future. Also, consider your options for a traditional savings account for your kids or grandkids with one of the top financial institutions listed above.