Kids are learning a valuable lesson today, along with their parents, as the stock market and the real estate market have destroyed billions of dollars of wealth of American families. The lesson that kids as young as five can tell you: Saving for a rainy day is not a bad idea. Before setting up a savings accounts for your child, consider the best manner to set up the ownership of the account.
Custodian Savings Accounts
The Uniform Gifts to Minors Act (UGMA) in 1956 provided a way for parents, grandparents, or other relatives and friends to gift money or securities to minors. In 1986 the Uniform Transfers to Minors Act (UTMA) provided a way to gift other types of property and expanded the laws regarding transfers to a minor. Both UGMA and UTMA accounts, called custodian accounts, represent a clear transfer of assets to the child beneficiary. Although the custodian controls the account until the minor turns 18, the money belongs to the child.
To transfer money or securities to a minor under UGMA or UTMA, a custodian account must be opened at a bank or brokerage firm. A custodian (adult) will manage the account until the minor turns 18 years of age. Even though an adult is making the investment decisions good or poor, at all times the beneficial owner of the account is the minor. All income is reported under the minor's social security number. There are no limits to the amount or number of contributions made to a custodian account. However, large amounts donated to a minor can be taxed under the gift tax law or lifetime estate tax law. Consult a tax consultant before setting aside a large amount of money into a custodian account.
If you find a good rate deal on a kids savings account, check the bank's website to see if it is a custodial account. Most banks that advertise good rates on kids savings will also have an easy online application that can be completed in a few minutes.
Kids Savings Accounts Jointly Held
A savings account can also be opened for a child jointly with an adult. Both the adult and child will need to furnish the bank their social security number, but the tax reporting can be made under the child's Social Security number. So while many of these bank savings account might be called "Kids-Only" or "Children's Savings," they are more like joint accounts set up and controlled by the parents or another adult. The money can be withdrawn and transferred with no penalties.
A kids savings account set up jointly between adult and child can also be set up for the easy online transfer of funds. This means that rate shoppers can maximize their interest by finding the best savings rates for their jointly-held kids savings accounts.
Which is Better?
That depends on your situation. On the one hand, a custodial account gives you the benefit of lowering your income and assets, but a jointly-held kids savings account is easier to open and easier to transfer funds between banks. Unfortunately many banks only offer one option (and not both) for their savings account designed for kids. Consider carefully the differences between the ownership in the two accounts before opening a savings account for your child.
The FDIC insures bank savings accounts up to $250,000 per depositor. If you have concerns about a bank account that you find online, check FDIC.gov to verify details and information about the bank.