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A guide to kids savings accounts

Has your child been stashing nickels and dimes in their piggy bank to the point it’s stuffed? As they start learning to save, you may want to consider putting the money in an account. But if you’re uncertain about which is the best savings account for kids, let’s explore your choices.

What is a kids savings account?

Parents can open a savings account and designate it for a child, even when minors can’t open a savings account by themselves. As the account owner, they can use it as a tool to teach them the ins and outs of saving money.

What is a custodial account?

Custodial accounts, where an adult is designated as the custodian of its funds, are the most common type of kids savings accounts. You could open a custodial savings account at a bank, including Ally Bank or a credit union. The money in these accounts is the property of the minor but is managed by the custodian.

When the minor reaches their state’s legal age of adulthood, the funds are turned over to them. The most common types of custodial accounts are known as Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), depending on your state.

Custodial account through a brokerage

You also have the option of opening a custodial account through a brokerage like Ally Invest , where you can gift stocks, mutual funds and bonds to your child.

What features should I look for in a kids savings account?

Security: Be sure to choose a bank that is a member of the Federal Deposit Insurance Corporation ( FDIC ), such as Ally Bank. Deposits in FDIC-member banks are insured up to the maximum amount allowed by law.

Interest: A good metric to look at when comparing savings accounts is annual percentage yield , which accounts for the interest rate and compounding periods. The more frequently interest compounds, the more you can earn. Ally Bank Savings Accounts also include features like buckets and boosters to help automate and grow your savings further.

You can also consider factors like minimum balance requirements, account access, potential fees and website usability.

How do I open a savings account for a child?

You can open a savings account online in just a few steps. As a bonus, savings accounts offered by online banks tend to offer more competitive interest rates than traditional brick-and-mortar banks due to lower overhead costs.

Guiding your kids with smart financial behaviors can benefit them now — and in the future.

Can you put a savings account into a trust?

A trust is an estate-planning tool to manage assets and provide instructions on distributing assets owned by the trust. If you set up a trust with your child as the beneficiary, you can generally outline when and how they gain access to the money in the account. A trust can be the custodian on a child’s account, but a legal professional can help you outline the best tools for your particular goals.

Can I open a joint account with a child?

If you want your child to have an account to withdraw from or use with a debit card, you might consider opening a joint checking account — if your state and financial institution allows it.

Joint accounts typically require an adult to serve as the primary account holder. Remember, joint accounts owners have equal access, so your child will have full access to the money in the account.

Do you pay taxes on children’s savings accounts?

Just like adults’ accounts, children may be taxed on interest earned in a savings account. Currently, if a child has more than $2,500 of unearned income it may need to be reflected on your child's tax return.

Start savings early

As a parent, you want to set your child up for success as they get older. Guiding your kids with smart financial behaviors can benefit them now — and in the future.

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