Setting Up a Savings Account for your Child

Parents share their tips on setting up savings accounts for their kids.

Question

One parents asks...

“We are looking for advice on the best bank to use for our son's savings account. Between my husband and I we have 3 banks. Someone recommended opening one account that we direct deposit into each month that he can't touch until college and then opening another account for him to deposit birthday money, etc into. Are some banks better than others for this type of thing?

Or should I just choose the bank that's most convenient for me?

Responses

Opt for convenience:

“I would say choose the one that's most convenient to you. You might end up changing things later along the way. My niece had a regular account that later became a trust a/c for which I am a trustee and as the money is now being invested, we had to change accounts again...

My son has an account in Wells Fargo (where our money manager operates out of) for which i am the custodial account holder and I find it such a drag to drop off gift checks as their locations are not all over the place."

Advice about Custodial Accounts:

“Just food for thought regarding custodial accounts: I recently opened a custodial account for my son, at Citibank, where I do the bulk of my banking (no real reason for banking at Citi except that I have had this account the longest and haven't found a better banking option). Since relatives often send checks addressed to my son I thought a savings account, that I could store b-day/holiday money in and then transfer to a 529, etc. later on, would be a good option.

Not quite.

The upside: Custodial accounts at Citibank are free until the child turns 18 and they can be linked to your existing accounts.

The downside: only one parent can be on the account, opening it was a pain (you need to do it in person, and despite what Citibank said online, a birth certificate was needed in addition to a SS card), and although deposits/transfers in can be done online/at ATMs, withdrawals must be done in person at the counter (big pain). All in all, a mixed bag in my opinion. I don't know if these rules are specific to Citibank, but just wanted to put that info out there....It might save you a trip to the bank.”

Tips on different types of accounts available and ways to save:

"First, a caveat: I am not a financial planner or a financial professional. It's hard to come up with generic advice because one family's requirements, concerns and risk tolerance may differ from another's. It sounds like you want to address savings in general, including college savings and also future discretionary savings that your son may make and draw on during his childhood. There was some discussion on the group last year about what banks have suitable accounts for children's short term savings (depositing and withdrawing allowance and small gifts). I can't remember which bank people cited (maybe TD bank) but such accounts exist. Since you refer to your son as a baby, that's probably not an immediate issue. If you can't find a fee-free segregated account, you could just keep small amounts in your own acct and track them, but perhaps there might be a concern you will lose track. For college savings, consider a 529 account. If you use the NYS plan you get an immediate tax deduction on your state return (not federal). The downside is that accumulated savings might tend to diminish potential future financial aid, which consideration might tend to offset the tax deduction. Very hard to game, so putting a little into a 529 is probably not a bad move. There is also a way to link the 529 plan to a credit card for additional savings (not sure how good that particular option is; I don't use that).

See: https://uii.nysaves.s.upromise.com/content/home.html

Also, if you will be older than 59 during part of your son's college career consider a Roth IRA, which will be considered retirement funds when applying for financial aid, will grow tax-sheltered, but which you can withdraw without tax consequences the year you turn 59 1/2. If you are conservative or pessimistic, another way to save for college is to pay extra payments on a mortgage, if you own your residence. Each dollar will multiply as it diminishes the debt and accelerates the amount of principal you are paying each month. Then you can use that accumulated extra equity to pay college expenses when the time comes. This is conservative in that it can't lose, but also will only yield a return equal to your mortgage rate, which is surely quite low these days. It also sounds as though you might have some additional funds (EG, the birthday money) you want to make available for other discretionary purposes when your son is older. If so, consider a mutual fund rather than a bank account. If these are discretionary than you can stand more risk, and the returns will likely be better over time than in a bank, which will yield essentially zero. You can shift to a bank account later on if you like. Also, generally speaking, if the acct is in his name gains will be taxed at his rate (probably zero), though will strongly impact financial aid if any significant amounts are in his name when he applies to college.”

Going online can possibly get your more for your buck:

“Switch to an online bank, like ING Direct, which offers substantially higher interest rates than Chase, Citibank, etc, with no fees. Currently, ING is offering 0.85%, Chase and Citibank 0.01%.”

“In lieu of or as a supplement to a bank savings account, there is First Kid Bank, software that allows the parent and child to track allowances, savings, charitable donations, etc.”

Invest in stocks:

“This is risky, and may teach him the wrong lesson, but you could simply buy a few shares of some stock and watch it go up or down with him. You could try to find a dividend-paying company to see some income. Just a little note of realism, however, that investing in stocks is not the same as it was 30 years ago. Many companies go out of business, go bankrupt, get sold, etc.”

Lock the money in CDs:

“Depending on the duration of the CD, the interest earned may be more or less that a savings account with an online bank like ING." Treat this process as a valuable lesson in economics:

“At almost no time does your money really help you in a savings account. In higher inflationary times, what looks like a great interest rate really just gives you back some of what you lose in inflation. What *really* earns money is working and using your money as capital to finance something (e.g. lemons for that lemonade stand).”

Once an account is set up, encourage your child to save by creating a parent interest rate scheme:

“You can set an interest rate and then "pay" him that interest. Supplement his savings with a parent-provided "bonus". For instance, for every $100 in his account as of (date), you could add $5 (that would approximate a healthy interest during inflationary times). This would reward him for saving in a more noticeable way."

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