Choosing The Right Type Of Account for Minors
There are many options for parents interested in introducing the concept of financial literacy to their children.
Bank accounts for minors represent the safety and practicality necessary to convey responsibility. The value in opening a savings account for a minor is immeasurable.
The exercise will foster learning and practical skill-building. Better still, the challenge will provide the basis for a parent/child bond during the practice of opening a bank account for a minor.
Before starting a bank account for a minor, have a brief conversation with yourself. Determine which specific goals you want to achieve. These goals will likely vary based on the age of your child. At an early age the mere presence of a checking account for a minor will bring great introductory value. Later, as your child retains more responsibility, it may be wise to broaden that responsibility to using a debit card for minors.
In this article, we’ll look at specific account options for those seeking to open a bank account for minors. Additionally, we’ll review ways to add not just educational value to opening a savings account for minors, but also ways to add monetary value.
We’ll review strategies for making the experience a success through exercising best practices and teaching tools. Lastly, we’ll take a hard look at some numbers to see where the real dollar-for-dollar value is. To start, the account types we’ll review are:
- Ordinary savings account
- Joint checking account
- UTMA & UGMA custodial
- Children’s account
Those asking, “Can a minor open a checking account?” will be pleased to learn that it is a simple and easy process when the parent takes ownership and acts as an involved guide for their child.
Opening an Ordinary Savings Account for Your Child
An ordinary savings account is the best option for a well-rounded learning experience. Opening a savings account for a minor joins the practicality of real-world experience to the less understood concept of restraint. Instant gratification is a universal desire among children. By opening a savings account for a minor, you are taking the first step in developing a stronger sense of willpower for your child.
You will need to include your name on the savings account for a minor as a joint owner. A child (younger than 18 years old, in most cases) will not be permitted to serve as the only holder. Opening a bank account for a minor is simple and quick. All that’s needed is some basic information from the parent and child. To make the experience of a bank account for a minor richer, be sure to discuss these aspects of the account with your child:
- Use of checks
- Entering deposits and withdrawals into a balance sheet
- Manually and electronically depositing funds
- Concepts and math behind interest rates earned
- Avoidance of fees
- Avoidance of a minimum balance
When opening a bank account for a minor, expect a very small interest rate. Don’t be discouraged. This is an exercise of financial literacy, not financial gains. In some cases, no interest rate will be offered. This is particularly true of larger, national banks. Smaller community banks and credit unions often offer rates closer to 1%.
Consider Capital One 360 as a bank account for a minor. The interest rate is a respectable 0.75%. Synchrony Bank has a much higher interest rate for their bank accounts for minors, offering 1.05% APY. Ally Bank represents a competitive option with an APY of 1%, no fees, and daily compounded interest.
Opening a Joint Checking Account
Opening a joint checking account is similar to opening a bank account for a minor. When opening a bank account for a minor, parents can emphasize one of two key areas:
- Building savings through discipline
- Managing deposits and withdraws for responsible money management
If parents opt for a joint checking account, they focus on the second of these two key areas.
The value in a joint checking account is that your child will learn organizational skills. With a checking account, there is likely to be more activity, with money coming in and going out, which is often a great learning experience for a child. How can a minor open a bank account? You will need to include your name on the account. This will make you a co-owner on the account.
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Before opening a bank account for a minor, especially a joint checking account, consider a few of the following aspects to ensure you choose the best option:
- Minimum initial deposit
- Minimum account balance
- Overdraft fees
- ATM fees and/or reimbursements
- Withdrawal signature requirements
These facets should be reviewed with your child as you investigate different banks and account options. This due diligence and research is part of the lesson. Bank accounts for minors represent a learning experience for the child only if he is involved in every aspect. Remember, though you’ll need to be a co-owner, it is best to behave as though the account is entirely the child’s; this is the purpose of opening a bank account for a minor.
Opening a bank account for a minor is a way to impose responsibility. Let children drive their own outcomes. You’re listed on the account only for emergencies and because it’s the law. Consider a Citibank checking account. The national spread of ATMs and full suite of automated options make it a great option for a long-term account choice.
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Opening a UTMA or a UGMA Custodial Account
Both a UTMA account (Uniform Transfer to Minor Act) and a UGMA account (Uniform Gift to Minor Act) are classified as custodial accounts. As a result, they represent a more intense commitment from the parent. They can be seen as more long-term than opening a savings account for a minor.
This goes beyond simply opening a bank account for minors. These accounts allow a minor (younger than 18 years old) to be the recipient of gifts. Examples of gifts include money, bonds, stocks, real estate, or even fine art. The custodian—usually the parent—manages the assets until the child reaches adulthood.
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This is an attractive option because it protects the child from the tax burden associated with the assets. Choosing a custodial account is more permanent than choosing to simply open a savings account for a minor. The differences between a UTMA and a UGMA are few:
- The age of adulthood is often 18 for a UGMA and 21 for a UTMA
- Assets permitted in a UGMA are restricted to basics, like money and socks
Be careful if you choose a custodial account. While the parent will serve as the custodian, the assets within the account become the property of the child upon reaching the required age. This custodial account for minors means that you, the custodian, will have no legal right to make decisions regarding the assets later in life.
In some cases, the assets can remain under the control of the custodian until the child ages to 25. However, in most states, control changes hands at 18. If you don’t think your child will be responsible enough at this age, consider other ways to open a bank account for a minor.
Opening a Children’s Account
Some banks promote the educational benefits that come with opening a savings account for minors. As a result there are special accounts available from some banks designed to serve this specific goal. One such offer comes from Fifth Third Bank. This customized plan is tailored to the parent wishing to instill strong financial habits in their child from an early age. There are no monthly service fees. The offered APY of 0.01% however, is not competitive. This rises up to 0.20% with enrollment in the “Relationship Money Market” account.
Santander also offers a customized option for opening a bank account for minors. The Santander Youth Savings account offers some attractive qualities:
- $10 minimum opening deposit
- No monthly fees
- 650 branches
- Identity theft assistance services
- Customized text alerts
For those who are a little older, Santander offers a Student Value checking account. Students between the ages of 16 and 25 qualify for this type of account. There is no monthly fee, and no minimum account balance is required. These accounts offer ease and flexibility knowing that the owners are young and unlikely to carry high balances.
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Wells Fargo offers Way2Save. Though not marketed strictly as a children’s savings account, many features are optimized for a younger owner. Those younger than 18 can avoid a monthly service fee while maintaining a $300 minimum daily balance. The account is designed to encourage savings by offering a recurring savings option. This is the other requirement for avoiding the $5 monthly service fee. Bank accounts for minors like this allow for a low risk, steady form of practice.
Putting the Money to Work
With the benefit of youth and a long-time horizon, why not put those savings to work? A UTMA is the best option for this. However, experts often advise that an account like this can have an adverse effect on those who will eventually seek college scholarships. Custodial accounts for minors allow the assets invested in stocks or bonds to grow untouched for 18 or even 21 years.
Bank accounts for minors can be incredibly powerful toward this goal. Consider the following difference:
Conventional Savings Account
- APY: 1%
- Term: 10 years
- Initial deposit: $10,000
- Total earnings: $1,051
UTMA Account Invested in S&P 500
- Estimated return: 7%
- Term: 10 Years
- Initial Deposit: $10,000
- Total Earnings: $9,671
The benefits of a custodial account for minors are clear. With a UTMA and a UGMA, there will be fewer opportunities for daily activity in and out of the account. As a result, there is no real “hands on” effect of learning about bank accounts for minors. However, there are new opportunities for learning, delving into the world of investing. Children, from an early age, will learn not just about opening a bank account for a minor but also:
- Understanding value through the P/E ratio
- Annual returns
- Expense ratios
- Cost basis
- Market benchmarks
This kaleidoscopic approach yields a return on investment and a level of investment knowledge that will far surpass most others. If you choose this path, keep a close eye on fees. The savings accounts outlined above void fees. However, a custodial account for a minor will not. Trading fees will apply, and expense ratios will be a factor in your investment growth. 12b-1 fees can erode value. Brokerage commissions also cut into balances if trades are frequent. These are new considerations that might be overlooked, as they do not apply to opening a savings account for a minor.
Exercising Best Practices
Opening a savings account for a minor is just step 1. Checking accounts for minors and debit cards for minors are part of the lesson. However, following a method for using the account is an important part of teaching financial responsibility. Set aside monthly check-ins to review the balances and spending with your child. This sets a cycle of discipline and accountability.
This applies to any kind of account you choose when opening a bank account for a minor. UTMA or UGMA accounts will require more of your attention. Take time to review the cost basis of the investments with your children. Review how the performance of the account measures against an established benchmark like the S&P 500. Talk about the costs associated with the decisions. Opening a bank account for a minor means illuminating risks. These can range from overdraft fees to loss of principle.
Keep a written list of your goals and your child’s goals. The original intent can become surprisingly obscured over time, so having written goals on hand will be useful down the road. Bank accounts for minors can be lost in the day-to-day details—if left inactive or underused, the exercise becomes one of futility.
Getting the Best Value
Competition for your money is strong. Use that to your advantage. The banks understand the value of obtaining a customer while he is young, and his parent is opening a bank account for a minor. For them, bank accounts for minors represent lifetime potential. This may very well become the account used for a direct deposit when a child starts working, or the child may use this bank to obtain a loan for his first home. When opening an account for a minor, be sure to aim for:
- No account fees
- No minimum balance
- No minimum initial deposit
- APY (if selecting a savings account) of at least 1%
- ATM reimbursements at non-branch locations
- Automated deposit capability
- Excellent customer service
As discussed above, the APY for children’s accounts are low, though some good options are out there. Go for a higher yield. More aggressive parents will want to opt for a reasonable expectation of a 6–7% return on the stock market with a custodial account for minors (e.g. UTMA/UGMA). Remember, the most critical message is this: just get started. Opening a savings account for a minor or even opening a custodial account for minors is easy and takes minutes. The rewards will last a lifetime.
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