Savings Accounts You Can Open for Your Kids
Children enrich our lives in so many ways, but they sure don’t come cheap! Every parent knows that expenses related to child-rearing and caring start the moment the pregnancy test comes back positive (if not sooner) — and that they can seem never-ending. From providing your child with their basic needs, like food and clothing, to paying for their endless wants and must-haves, to securing their future, the expenses can be exponential.
Fortunately, there are easy ways to save up for your child’s future to make this more manageable.
Let’s take a look at several popular savings options you can open for your kids, and the benefits and factors to consider for each one.
1. 529 Savings Plans
A 529 plan is a tax-advantaged plan designed to encourage saving for future educational costs. These plans are sponsored by states, state agencies or educational institutions, and offer significant tax benefits.
Benefits:
- Tax advantages. Earnings grow tax-deferred, and withdrawals for qualified education expenses are tax-free. Some states will also offer tax deductions or credits for contributions to their own state’s 529 plan.
- High contribution limits. 529 plans typically have high contribution limits, allowing you to save a substantial amount over time.
- Flexibility. Funds can be used for a variety of educational expenses, including tuition, room and board and even K-12 education in some cases.
Considerations:
- Investment options. 529 plans offer various investment options, which may include age-based portfolios that become more conservative as the beneficiary approaches college age.
- Fees. Most 529 plans will have annual fees. These will vary by state and institution.
- Ownership. The account owner of a 529 plan has full control over the funds; the beneficiary does not.
2. High-yield Savings Accounts
High-yield savings accounts offer higher interest rates than traditional savings accounts, making them an excellent option for growing your child’s savings.
Benefits:
- Higher interest rates. These accounts offer significantly higher interest rates, helping the savings grow faster.
- Safety. Funds in high-yield savings accounts are typically insured up to $250,000 per depositor, per institution.
Considerations:
- Accessibility. High-yield savings accounts are usually available online, making them easy to manage.
- Interest rate variability. Interest rates can fluctuate based on market conditions.
3. Money Market Accounts
Money market accounts combine features of savings accounts and checking accounts, offering higher interest rates along with check-writing privileges with some, but not all, accounts.
Benefits:
- Higher interest rates. Money market accounts generally offer higher interest rates than regular savings accounts.
- Liquidity. These accounts provide more flexibility and access to funds through check-writing and debit card options.
Considerations:
- Minimum balance requirements. Money market accounts often have higher minimum balance requirements.
- Limited transactions. There may be limits on the number and type of transactions you can make each month.
4. Custodial Accounts
Custodial accounts allow an adult, or “custodian,” to transfer assets to a minor without the need for a trust.
Benefits:
- Flexibility. These accounts can hold various types of assets, including cash, stocks, bonds and mutual funds.
- Control. The custodian manages the account until the child reaches the age of maturity, typically 18 or 21, depending on the state.
Considerations:
- Tax implications. Earnings are taxed at the child’s tax rate, which is usually lower than the parent’s rate.
- Ownership transfer. Once the child reaches the age of maturity, they gain full control over the account.
5. Share Certificates
Share certificates are accounts that offer a fixed dividend rate for a specified term, ranging from a few months to several years.
Benefits:
- Fixed returns. Share certificates offer a guaranteed return, making them a safe investment.
- Higher interest rates. Longer-term share certificates typically offer higher earning rates than regular savings accounts.
Considerations:
- Early withdrawal penalties. Withdrawing funds before the certificate matures may result in penalties.
- Limited liquidity. Funds are locked in for the term of the certificate.
Opening a savings account for your child is a smart way to secure their financial future and instill good money management habits early on. Use this guide to make an informed decision about choosing the perfect savings account for your child.
6. Divy's Savings Account
Our Divy Savings Account offer no annual fees and dividends paid on balances of $100, or more, to help you teach your child that saving money always pays. This account is open to members 13 years of age and younger and can be opened with a $5 minimum deposit. All new members that open a Divy Savings Account will receive quarterly statements and a FREE Diamond Valley Piggy Bank. Get more information here!