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The Basics of Baby Savings Accounts
Key Takeaways
- Opening a savings account for a baby is simple, and the balance can grow significantly over time with automatic deposits.
- To increase returns, look for a high-yield savings account with low or no fees.
- Alternatives that may be a better fit for your child’s savings include a 529 plan, CD, Roth IRA and investment account.
Congratulations! The stork just delivered a bouncing baby boy or girl. But alas, the big-beaked bird failed to deliver advice on how to save money for your new arrival. So, what about opening a baby bank account?
“It’s a great idea,” says Judith Corprew, executive vice president and chief compliance and risk officer at Patriot Bank. “Compound interest does best with a very long runway. If you start even by socking away $5 or $10 a week, the power of growth will do wonders, but it is also an opportunity to indoctrinate children into understanding how to save for their future.”
How to Open a Savings Account for a Baby
As with any type of savings account, you’ll need some information and paperwork to get started. Your checklist should include:
- Your name.
- Your baby’s name.
- Your ID, such as your driver’s license or another type of identity verification.
- Your baby’s birth certificate.
- A place to open the account. You might select your current bank or credit union, or you might opt for an online bank. Pay close attention to the annual percentage yield to maximize the interest the account earns.
- Funds to make a minimum deposit or maintain a minimum balance. Ideally, you should pick an account that requires neither a minimum deposit nor a minimum balance.
Once you’ve got all your information and paperwork in order, it’s time to open the account. You may want to visit a branch to get help setting up the account, since opening a baby savings account isn’t the same as opening a traditional account. However, you may be perfectly comfortable opening the account online or over the phone.
If you want to open an account before your baby is born, you can do that, but it’ll be under your name and your Social Security number. Once your child has arrived, your financial institution can adjust the account to add your baby’s details.
The Pros and Cons of a Baby Savings Account
Pros
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It’s convenient. Depositing money in a baby savings account is as simple as putting money in a traditional savings or checking account.
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It’s ideal for automatic deposits. A “set it and forget it” automatic deposit of just $250 a month, contributed over five years with a starting balance of $100, would turn into more than $16,000 by the time your kid turns 5. This assumes a 3% interest rate.
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Your child can learn financial Lessons. As your child gets older, depositing money in a savings account will be an increasingly valuable experience in terms of managing money and making a habit of saving cash. “Even if the amount is small, eventually you’ll see these deposits add up and grow over time,” says Tim Sheehan, co-founder and CEO of Greenlight, a provider of debit cards for kids. “When your child is of age, you can show them the meaningful growth and begin instilling good saving habits.”
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There are tax advantages. You’re the custodian of the account, but the account belongs to the minor. Since kids usually don’t earn enough money to pay taxes, their interest income generally isn’t taxed.
Cons
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Returns are potentially weak. As of April 2024, the average interest rate for a savings account was 0.46%, according to the Federal Deposit Insurance Corp. At that rate, money isn’t going to grow much over time. To strengthen the returns, look for a high-yield savings account with low or no fees and a high annual percentage yield.
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Some accounts charge fees. Some banks and credit unions might charge a monthly maintenance fee for savings accounts if an account doesn’t meet minimum balance requirements. Unfortunately, fees can eat up interest that the account earns. However, a number of financial institutions waive monthly fees for savings accounts if the account holder is under a certain age, such as 18.
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Some accounts have withdrawal restrictions. The Federal Reserve has abandoned its six-withdrawals-per-month limit for savings accounts, but some banks still restrict the number of monthly withdrawals.
Baby Savings Accounts Alternatives
If you’re not sold on opening a savings account for your newborn, consider these alternatives.
- 529 plan. A 529 plan is a special savings account for education-related expenses such as tuition, meals and computers. It provides investment growth and tax advantages that are similar to retirement accounts.
- CD. A certificate of deposit may be another alternative to a savings account for a baby. You can open a CD as a custodial account, meaning you’re the custodian but your child is the account holder. One advantage of a CD is that it might pay a higher interest rate than a savings account, but one drawback is that you may be hit with a financial penalty if you withdraw money from the CD before the end of the term.
- Investment account. An adult can open a custodial brokerage account at a bank or brokerage firm to invest money on behalf of a child. One investing option may be an index fund. This is an investment vehicle tied to a certain index, such as the S&P 500. The S&P 500 is based on the stock values of 500 large companies, so the fate of your child’s money would be tied to the performance of the index. As of mid-April 2024, the S&P 500’s 10-year annualized return was 13%.
- Roth IRA. Another type of custodial account you can open for a child is a Roth IRA. A parent or another adult must initially manage the account, but the child can take over when they reach the age of majority (normally 18). At that point, it’ll be converted into a Roth IRA in the child’s name. Roth IRA contributions are made with after-tax dollars, but the funds grow on a tax-free basis.
Baby Savings Accounts vs. Child Savings Accounts
Baby savings accounts and child savings accounts are essentially the same.
By law, a minor can’t open a savings account. Instead, a parent or guardian must set up a custodial savings account or joint account for a minor child.
A custodial account belongs to the child, but an adult oversees it until the child is old enough to do it on their own (typically age 18). Meanwhile, both a child and adult have access to a joint account, although the adult can restrict account activity until the child reaches a certain age.
