Types of Savings Accounts for Kids and How to Get Started

Encouraging kids to set aside money in a piggy bank or coin jar is a time-honored way to help spur financial learning. But a more effective strategy for helping kids boost their financial know-how may be to open a savings account on their behalf and then let them know that it exists.

What is a Kids Savings Account?

A savings account for kids is a deposit or investment account that's intended to store savings on behalf of a minor who may be too young to open an account themselves. For example, the account may hold money that has been gifted to a child or that they earned through a job or an allowance. Or it could be used to grow savings for a minor's education or for their other everyday needs.

However, not all types of savings account options are equal. So before you open an account on a child's behalf, it's a good idea to survey all your options.

Some kids' savings accounts, for example, come with restrictions, limiting a family's ability to use the money they have invested. Others are more flexible, but may not offer as many guardrails or as strong a return on the money that's put in. Here's a rundown of some of the most common types of savings accounts you can open for a minor.

1. Custodial Accounts

A custodial account is typically a savings account that an adult controls for a minor. However, custodial accounts are technically any type of financial account that is opened on behalf of someone else—typically a minor—and managed by someone over the age of 18. This could include an investment account opened by a grandparent to help transfer generational wealth or a long-term savings account managed by a parent.

Custodial accounts are more restrictive than other savings account options. For example, the money you put in is irrevocable. So you can't change your mind and take it back later on. Some custodial accounts may also restrict when you or your child can access the funds.

But unlike some longer-term savings options for kids, such as 529 plans, custodial access doesn't restrict how you use the funds—as long as you spend the money on a child's behalf. For example, the funds from a custodial account may be used to pay for clothes, save for summer camps or fund other child expenses.

Uniform Transfers to Minors Act (UTMA) Accounts

In the past, there used to be two types of custodial accounts that could be opened on behalf of a minor, each with their own state rules and regulations: UTMA Accounts (short for Uniform Transfers to Minors Act) and UGMA accounts (which stands for Uniform Gift to Minors Act). But as of 2022, all 50 states now offer UTMA accounts, which are a bit more flexible than the older UGMA accounts that limited what assets you could put into them.

With a UTMA account, you can transfer virtually any kind of asset to your child's account. UTMA accounts also offer a relatively long window for when kids need to pull money from them. Depending on the account and the state they live in, a beneficiary may have until they're 21 or 25 to withdraw all their funds from it.

Advantages of a Custodial Account

There are many benefits to setting up this type of savings account for kids, including:

• • No income limits
• • No contribution limits
• • No withdrawal penalties

How to Open a Custodial Account

To open a custodial account, a custodian must open the account on the child's behalf with the child's personal information.

Any money in this account will belong to the minor but is controlled by the custodian until the minor reaches the age of majority, generally 21 in all states.

You can open a UTMA savings account at Riverstones Vista Capital on behalf of your child. Depending on the state you reside in, you will be acting as your child's custodian until they are either 18 or 21. All states now offer UTMA accounts. The custodian is entirely responsible for managing the account; the minor cannot perform any transactions alone.

If the savings account is a UTMA CD account, then maturity dates apply. Any request to close a CD account before it matures will have an early withdrawal penalty.

Tax Information:

• • Minor's taxpayer identification number is their social security number
• • 1099-INT is issued in the minor's name and social security number

The Custodian must provide:

• • The minor's legal name
• • The minor's date of birth
• • The minor's social security number
• • The minor's permanent residential address
• • An alternate address matching the custodian's mailing address

Once you open the custodial account, you can then register it online to view account details, deposit or withdraw money or make other quick transactions. You can also save time with the Riverstones Vista Capital Mobile App, which allows you to make mobile deposits and bank on the go.

2. Joint Savings Accounts

An alternative to custodial accounts and also a more flexible savings option is to open a joint savings account with a child. This type of savings account may also allow kids to have easier access to the funds. For example, some joint savings accounts may even offer debit cards for kids. However, not all banks (including Riverstones Vista Capital ) allow minors on joint accounts.

In addition, you may consider looking into jointly opening other types of savings accounts for kids, such as a certificate of deposit, high-yield savings or money market account. These types of savings accounts typically offer higher interest rates than more traditional savings accounts. However, some are also more restrictive. For example, a certificate of deposit (CD) requires you to leave the funds in the account for a set period or pay a penalty.

How to Open a Joint Savings Account

If you wish to open a joint savings account to start saving money for your child, here is some information that may be required (depending on the institution):

• • Your identification, in the form of a passport or driver's license
• • Your social security number
• • Your personal details including your name, address and date of birth
• • You will also need similar information for the minor (a birth certificate or social security card is often used in place of a driver's license)
• • An initial deposit, if required

3. Educational Savings Accounts

Another savings option is to open a 529 plan that's designed specifically for educational expenses. A big benefit to 529 plans compared to other long-term savings accounts, such as custodial accounts, is that they offer special tax benefits for depositors. For example, money saved in a 529 plan grows tax-free. As long as you use it to pay for qualifying educational expenses, you won't have to pay taxes on the account's earnings. Some states may also offer other tax breaks, such as allowing you to deduct the savings you put in.

Types of Kids Savings Accounts: Pros and Cons

 

Kids' Savings Options	Pros	Cons	When to open?
Custodial Accounts	You can make unlimited contributions Funds can be used for a wide variety of expenses Earnings grow in a child's name and so a portion may be taxed at a lower rate UTMA accounts allow you to transfer any kind of asset, including tangible assets such as real estate and higher-yield investments, such as mutual funds	Contributions are irrevocable Funds may only be used on a minor's behalf or transferred to a minor after they come of age No special tax breaks: All account earnings are taxable Contributions may be subject to a gift tax Assets in a child's name may negatively impact their college financial aid package	Anytime before the age of 21: A custodial account is a particularly good choice for longer-term savings options, such as investment accounts
Joint Accounts	You are considered an equal accountholder and so can freely transfer money back and forth between your accounts You don't have to pay gift taxes on contributions made to a joint savings account–unless your child withdraws money from it Funds can be used for any expense Some joint account options may offer special perks for kids, such as debit cards	No special tax breaks: all earnings are taxable Since the account is in your name, all earnings are taxed at your typical rate Fewer guardrails than custodial accounts: you can use it for any expense, including expenses that don't directly benefit kids Earnings may be lower for deposit accounts compared to other investment options	As soon as a child is old enough to contribute funds and help manage the account: A joint savings account works especially well for short-term savings and for everyday financial practice
Educational Accounts	May offer special tax benefits: For example, earnings in a 529 plan are tax-free as long as they're used for qualifying expenses Savings that are invested in a 529 plan may grow faster than savings left in a deposit account Assets held in a 529 plan may have a smaller impact on kids' financial aid than assets held in a custodial account You can transfer funds from a 529 plan to another beneficiary if a child chooses not to pursue more education	529 plans are long-term investment accounts, so kids can't use them for everyday financial practice To remain tax and penalty-free, 529 funds can only be used for qualified educational expenses Investment options may be limited Additional contributions may be subject to a gift tax	As soon as possible: The sooner you start saving for a kids' education, the better

 

The Benefits of Opening a Kids Savings Account

A savings account opened on a child's behalf can be a powerful teaching tool and motivator. A wealth of research has found that kids often benefit from frank discussions about money. Kids who learn about money from an early age, for example, are more likely to grow into financially confident adults with less credit card debt and more robust savings than their peers.

But for early financial lessons to stick, kids also need ample opportunity to practice what they've learned. Research suggests that opening a savings account in a child's name could be an especially effective way to teach them important banking concepts and motivate them to save.

READ MORE: New Child, New Savings Plan

Inspire kids to think more about their future

Even if an account is set up in such a way that a child can't access the money until they're 21 years of age, just learning about the account could be helpful to a child's long-term financial well-being. For example, some studies suggest that simply knowing that a savings account has been opened in their name may help kids imagine a brighter future. As Margaret Clancy of Washington University's Center for Social Development noted in a news release: "There is evidence that the positive effect of savings may be more than economic—assets are related to changing the college expectations of parents and children."

Boost their earning power as adults

Multiple studies have also found that young children from modest backgrounds are substantially more likely to enroll in and graduate from college when a savings account is opened on their behalf—even if that account has very little money in it.

Build financial self-efficacy and confidence

Kids also appear to learn more from first-hand banking experience and early exposure to financial tools and concepts. For example, one study found that elementary school students who went on class field trips to banks and opened their own deposit accounts scored higher on financial literacy tests than peers.

Instill lifelong financial habits

For example, one study found that young adults with savings accounts as kids were twice as likely to still have one as an adult. They were also four times as likely to invest in stocks and tended to have more money saved up than peers who started banking at a later age.

Help amplify family savings

Custodial accounts and other long-term savings options, such as 529 plans, can be especially helpful for families that need extra time to save for big expenses, such as higher education. Since they're more restrictive than other savings options, such as joint bank accounts, they may also be appealing to families looking for ways to ensure that the funds are used only for kids.

When to Open a Kids Savings Account

The best time to open any savings account is usually as soon as possible: The sooner you invest your money, the more you'll typically earn through compound interest. However, some savings accounts may be better suited for older kids than younger ones. So before opening one, you'll want to consider a child's age and how involved they will be in maintaining the account.

For example, the perks offered by a joint savings account, such as a kids' debit card, may go unused by younger children. In that case, you may be better off putting the money into an account that earns more interest, such as a CD. But once your child is old enough to start participating in saving and spending their own money, then you may want to consider opening a joint savings account, such as a money market account, that allows for more frequent withdrawals.

Tips for Teaching Kids Money Management

The key to helping kids be successful with their money is to give them just enough independence to learn—without giving them too much freedom that they get themselves into trouble. For example:

Stay involved in kids' decision-making

Even if a child seems to be making good decisions on their own, it's still a good idea to watch over them and stay involved in their decision-making, even if you're only acting as a mentor. Research shows that kids tend to do best when families talk openly about money.

Allow kids to fail

One of the biggest benefits of opening an account for a child while they're young is that it gives them a chance to make mistakes and bounce back from them, without huge consequences. It can be tempting to swoop in as soon as a child stumbles with their savings. But kids often benefit when given the chance to solve problems of their own making. As former University of Arizona researcher Ashley LeBaron noted in a news release highlighting her own research into kids' financial socialization: "I think it's hard for parents, sometimes, to let their kids make mistakes. It's tempting to just shield kids from everything related to money, but it's really important for parents to get money into kids' hands early on so they can practice working for it, managing it and learning how to spend it wisely."

Keep money lessons age appropriate

Finally, make sure the lessons you're imparting aren't going over kids' heads. Experts say that even very young kids can benefit from being exposed to financial concepts. Research has also shown that first-hand experience can be particularly helpful for young kids. However, you may want to wait until a child is at least in elementary school before involving them in the maintenance of a savings account: that way, they are more likely to have the maturity to follow what they're learning and make more thoughtful decisions.

Bottom Line

Opening a savings account for a young person in your life can be a great way to pass on your financial wisdom and show them you care for their long-term well-being. Inviting them to help care for the account may also help kids establish positive financial habits. Riverstones Vista Capital offers a number of savings account options that may be especially useful for helping kids grow both short- and long-term savings, including high-yield savings accounts, CDs and money market accounts.

If you need help choosing the right account for your family, try calling a Riverstones Vista Capital personal banker at +1(803) 824-0007.

 

Kelly Dilworth is a business and personal finance reporter, specializing in the intersection between money and life. She has covered consumer banking and lending for more than a decade and particularly enjoys writing about consumer behavior and psychology, new consumer research and how everyday banking products impact people's lives.

LEARN MORE: Types of Savings Accounts for Kids