Best Savings Accounts for Kids

We all want to set our children up well for their future. Part of that is teaching our kids about financial preparedness. Adults know that having money in the bank can help ward off catastrophe – too many of us have learned this the hard way!

But, we’d prefer to save our kids those hard lessons. So how do save for our children’s education and help them put aside money for other goals?

Several banks offer savings accounts for children with features like controls you can put on their spending and transaction alerts.

Opening a savings account and teaching your child to use it is a good first step toward teaching your kids money management. But, it’s also important to start their college savings now.

Table of Contents

1. Find the Right Savings Account for Your Child
1. Features to Look for in a Kids’ Savings Account
2. Best College Savings Accounts for Kids
1. What Is a 529 Plan?
2. Education Savings Accounts
3. UGMA and UTMA Accounts
4. Use the GI Bill for College
3. Best Savings Accounts for Babies
4. Best Savings Accounts for Young Children
1. Capital One Kids Savings Account
2. USAA Youth Accounts
3. Navy Federal Credit Union
5. Best Savings Accounts for Teenagers
1. Chase First Accounts
2. Axos Bank First Checking Account
3. Alliant Credit Union
4. CIT Bank
5. First Command Teen Money Markey Account
6. How to Open a Savings Account for a Child
1. Do You Pay Taxes on Children’s Savings Accounts?
7. Best Teaching Tools for Financial Literacy

Find the Right Savings Account for Your Child

By far, the biggest expense on our children’s horizons is higher education, but there are other reasons to help them save.

With all the digital options available, it doesn’t make sense to teach your child to save by stuffing money into a piggy bank. Just as you “train as you fight” in the military, consider teaching your children how to manage money with the same tools they’ll use as adults.

One size doesn’t fit all of your child’s unique savings needs. Different accounts can help you and your child maximize savings and tax benefits for short-term, medium-term and long-term savings goals.

For short and medium-term expenses like that prom dress or a new car, it is appropriate to help your children learn to manage their money by helping them set up a checking or savings account. The best banking account for your children depends on their age and education level.

For long-term goals, mostly related to higher education, you can open tax-advantaged education investment accounts on their behalf. When you save for your children’s education using a 529 plan, Coverdell ESA or a UGMA/UTMA account, your children can’t use the money until they become adults. You, as the custodian are the primary contributor to these accounts.

A combination of savings and tax-advantaged education accounts is appropriate to help plan for college expenses and teach your children about financial responsibility. Let’s look at how to choose and set up each of these accounts.

Features to Look for in a Kids’ Savings Account

When is the last time you shopped around to make sure you are getting the best deals from your banking relationships?

Shopping around for the best kids’ account may even show you some beneficial options for yourself.

Here’s what to look for:

• No Fees. Many banks offer checking and savings accounts at little or no cost.
• Low Minimum Opening Balances. Most banks offer low minimum opening balances even for kids’ accounts. The most competitive balance requirements are $100 or less.
• Socially Responsible. Socially Responsible taxable investment accounts are available at banks like Aspiration, which bills itself as a “green banking alternative.” You can use these accounts to supplement your children’s education savings.
• Higher APYs. The higher the APY, the more money the account will earn in interest.
• Insured institutions. For banks, FDIC insurance covers potential losses. For federal credit unions, the National Credit Union Administration (NCUA) insures deposits.
• ATM fees rebates. Some banks rebate ATM fees, even those accrued at non-member ATMs. Over time, ATM fees can add significantly to the cost of managing your account. If your child pays a $3.00 ATM fee to withdraw cash, that is effectively a 3% added to the cost of a $100 transaction.

Want to compare features of different checking and savings accounts?

Check out the SuperMoney Banking comparison shopping tool.

Best College Savings Accounts for Kids

Even if your kids have some GI Bill coverage, education is still likely the most significant expense they will have in their early adult years. Thirty-six months of post-911 GI Bill may not fully fund your child’s bachelor’s degree program.

Saving for college is more important than ever, as the price of higher education continues to balloon. From 2010 to 2020, education costs at four-year colleges increased 13% at public institutions and 18% at private nonprofit schools, according to the National Center for Education Statistics.

Your child’s college savings account must increase in tandem with tuition hikes, or they might have to rely on student loans.

Relying on student loans is a bad idea unless you don’t have another choice. Excessive student debt can start a vicious cycle of high-interest debt. It can take years for your children to pay back this debt and start saving for houses and retirement.

The good news is by choosing the right account and taking advantage of tax benefits, you don’t have to put aside a ton of money now to cover your children’s future education expenses.

Fortunately, several investment vehicles, including 529 plans, Coverdell education savings accounts and UTMA/UGMA accounts can help you keep up.

What Is a 529 Plan?

The best type of tax-advantaged accounts to save for education are qualified tuition programs, also known as 529 plans.

You don’t have to understand the stock market to take advantage of a 529 plan. States administer most 529 plans, and the plan you opt into will dictate your investments. You can only change your 529 asset allocation twice per year, and you can’t add outside investments to a 529 plan.

Here’s how 529 plans work:

• You make after-tax contributions to an investment account
• Over time, your investments grow
• Your and your child use the money for qualified education expenses
• You don’t have to pay taxes on any of the growth

Qualified education expenses include tuition and other school fees, books, supplies and equipment. Living expenses also qualify, but only if the student is at least a half-time student.

A 529 plan does not limit your child’s educational options to four-year colleges. Students can use their 529 funds for vocational school and even many foreign institutions.

Here is a full list of the 6,213 institutions that qualify for 529 Plan expenses, according to the Department of Education’s federal student aid office.

You can even use 529 funds to pay for up to $10,000 in annual tuition for a K-12 public, private or religious school, thanks to the Tax Cuts and Jobs Act of 2017.

While 529 plans don’t have limits on annual contributions, you may have to file a gift tax return if you contribute more than $15,000 to your child’s 529 plan ($30,000 if filing jointly).

Education Savings Accounts

Education Savings Accounts (ESAs) are also called Coverdell plans or Coverdell ESAs.

ESAs work like 529 plans but with a few key differences:

• You can choose from a wider range of investments
• You can’t contribute after the beneficiary reaches 18
• The beneficiary must use the funds before age 30
• Your modified adjusted gross income can’t exceed $110,000 if you’re single or $220,000 for married filers
• Your max contribution is $2,000 per year per beneficiary

You might choose an ESA over a 529 if you understand the stock market and want to choose your own investments or exchange-traded funds (ETF). But, the accounts aren’t mutually exclusive. You can have both, and even roll your Coverdell into your 529 plan.

You can only contribute up to $2,000 a year to a Coverdell ESA, so you can’t roll a 529 into an ESA.

UGMA and UTMA Accounts

You can also use a Uniform Transfers to Minors Act (UTMA) account or a Universal Gifts to Minors Act (UGMA) account to save for your child’s education.

Both of these are custodial accounts, meaning you’d manage them until your state’s age of minority and trust termination.

You can use a UTMA or a UGMA account to transfer normal financial assets to your children– stocks, bonds, mutual funds and ETFs. UTMAs also allow you to transfer real property, including cars, real estate and art.

These accounts aren’t tax-advantaged, so you’ll have to pay capital gains taxes on your growth. However, beneficiaries under age 19 (or 24 if enrolled in full-time education) don’t have to pay taxes on the first $1,050 of either account, according to the Financial Industry Regulatory Authority (FINRA). The IRS taxes the next $1,050 at the beneficiary’s tax bracket, which is typically lower than that of their parents. After $2,100, the beneficiary will have to pay taxes at the custodian’s tax rate.

Why Choose UGMA or UTMA Account?

You can set up a UGMA or UTMA account without paying to set up a trust.

Your child doesn’t have to use UGMA and UTMA account funds for education expenses because these are not strictly education accounts. Your children can use gifted or transferred funds for whatever they need to with no penalty. These funds can help your child pay for non-qualified education expenses, health insurance or a car.

UGMA/UTMA accounts are simple enough that you can set them up through some robo-advisors. If you set up an Acorns Early account, you can invest spare change to start a UGMA/UTMA account for your child.

More:

The Best Robo-Advisors for Military Members

Best Savings Accounts for Babies

Babies are too young to learn money management skills, so if you’re opening a baby savings account, consider starting off with one of the educational savings accounts above.

Even if you only have a few extra bucks, beginning your baby’s college fund at birth helps you max out your compound interest gains.

Assuming a 5% return, if you open a tax-advantaged savings account with $1,000 when your baby is born and add $100 per month until they turn 18, you could provide more than $37,000 in tax-free college money.

Want to calculate projected and investment savings targets for your kids’ education?

Try out the Securities and Exchange Commission’s compound interest calculator

Best Savings Accounts for Young Children

Most banks require an adult have at least one account with them before approving a child’s account. So, the best savings accounts for young children are usually where you’re already banking.

If you’re looking to change banks anyway, factor in children’s saving account options into your decision.

Here are a few options:

Capital One Kids Savings Account

The Capital One Kids Savings Account is one suitable savings account for young children.

These fee-free accounts come with a mobile banking app and have no minimum balance requirement.

If you’re a Capital One customer, you can easily transfer money from your account to theirs, which is a great way to pay them an allowance while teaching them some banking basics.

This online savings account for kids allows young children to check their balance whenever they want, but doesn’t allow withdrawals without a parent’s approval. If you are located near a Capital One branch, you can also receive in-person support.

Capital One’s youth savings accounts have a .30% APY. Once your child turns 18, their Capital One Kids Savings account automatically converts into a Capital One 360 savings account.

USAA Youth Accounts

USAA is another option youth savings account option. The military-friendly bank also offers youth checking accounts.

Both allow you to create and edit parental controls, so you can limit how your children use their accounts. Both USAA accounts have .01% APY.

Navy Federal Credit Union

If you do your banking at a credit union, check to see what youth accounts are available. Navy Federal Credit Union, for example, allows members to set up youth and educational savings accounts for their children.

Best Savings Accounts for Teenagers

If you have older kids, they’re probably already thinking of short and mid-term savings goals, like purchasing their first car.

If you want to give your older children and teenagers more control over their spending decisions, consider supplementing teenagers’ savings accounts with a checking account.

You can use the two account types to teach your children the difference between long-term savings and short-term expenses.

Here are a few banks that have good savings and checking options for teenagers.

Chase First Accounts

If you’re already a Chase customer, consider opening a no-fee Chase kid’s savings account. You can open Chase First accounts for children aged 6-17

Chase kids’ bank accounts don’t earn APY, but they do come with a fully functioning debit card that you can control. Unlike a credit card, debit cards allow teens to see how their spending impacts their bank account right away.

Parents can opt-in for spending alerts and set limits on how much kids are allowed to spend in certain places, like restaurants or retail stores. Your children can also send you money requests in the Chase app, which you can approve or decline.

For your older teens, you can take it a step further and open a Chase High School Checking account, which adds personal check writing and money transfer services. It also removes some of the spending controls in a Chase First account.

Chase doesn’t charge active-duty military members or veterans monthly fees for personal checking accounts.

Axos Bank First Checking Account

Besides age-appropriate accounts at your banking institution, you may also consider ranking potential banks by APY.

Consider an interest-earning account if your child has enough in savings to accrue significant interest.

Your child can earn a .10% APY with a First Checking Account from Axos Bank. These accounts have no fees and can earn you $12 per month in ATM reimbursement fees.

Alliant Credit Union

Despite rising rates, most banks are paying low or no interest rates for checking and savings deposits. Of the rates we researched for children’s savings accounts, Alliant Credit Union stood above the rest with a 0.60% APY. That’s 12 times higher than the national average rate of .05% APY for savings accounts at banks, according to National Association of Federal Credit Unions data.

Alliant Credit Union exempts your child’s savings account from service fees if you opt into paperless online banking statements. It has no minimum deposit at account opening. Instead, the bank awards your child a $5 bonus!

You must be an Alliant Credit Union account holder to open a kids account. If you don’t have an Alliant account, you can take advantage of Aliiant’s interest-earning rates with a $5 deposit, and you don’t have to leave your current bank.

CIT Bank

CIT Bank offers high-yield savings accounts, long-term CDs and even UTMA custodial accounts.

You can use these alternatives to traditional checking and savings accounts to teach your children about more advanced financial topics and long-term savings strategies.

First Command Teen Money Markey Account

First Command is a military-friendly institution that offers teen money market accounts.

You can also open a money market account for your child, which has a higher interest rate than a regular savings account but, with checking account features.

How to Open a Savings Account for a Child

There are no federal laws prohibiting minors from opening savings accounts, according to the Federal Deposit Insurance Corporation (FDIC). However, contracts govern bank deposits, and minors can’t enter into contracts in most states.

For this reason, your child’s account usually has to be a joint account with you, and banks require parents to open and manage their children’s accounts. So, you’ll need to have a regular savings account or another account with whichever bank you choose.

Opening a savings account for your child is like opening a savings account for yourself.

Provide the bank with your identification for you and your child and your current bank account information. Have your social security numbers and dates of birth on hand as well.

Best Teaching Tools for Financial Literacy

If your child is saving for themselves, proactively teaching them financial responsibility and how to make savings goals will help them become financially responsible. According to the FDIC, there are correlations between financial education and good savings habits, including lower debt levels, more savings and a better credit score as an adult.

Schools are implementing new standard guidelines on specific financial educational competencies students should have by the fourth, eighth and twelfth grades, according to the new National Standards for Personal Financial Education.

Under these guidelines, students in the fourth grade will learn how entrepreneurs can make money by starting or owning a business. By twelfth grade, students will understand unearned income, (interest, dividends and capital appreciation) and how capital gains taxes work.

If you want to get involved in your kids financial education too, the Consumer Financial Protection Bureau has free financial online education activities for children of all ages.

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