Financial Accounts for Minors

One of the most important things you can do for your child is to teach him or her about money management. One of the ways you can do this is by helping him or her open a bank account. A checking account or savings account (or both!) can help your child learn how money works, and can provide you with a way to teach your child about reading statements, saving for the future, earning interest, and tracking spending.

When to open an account – and what type of account to open – depends largely on what your child is ready for. My son has had a savings account at the local credit union since he was five years old. (When he’s a little older, we will talk more about earning higher interest and probably shift to an online account with a higher yield. But, for now, it’s fun for him to go to the bank physically and put money in, receiving the bank receipt showing his growing balance. And, of course, enjoying prizes received for reaching milestones. For now, it’s about getting him excited about the savings habit.)

My mother opened a joint checking account with me when I was 12, and began teaching me about keeping track of my purchases, reconciling a statement and budgeting. These lessons proved valuable later in life – even though I went through a period of financial rebellion, making foolish decisions. However, the lessons learned with the help of that bank account stuck with me, and provided a touchstone for when I was ready to clean up my money act.

There are some things to understand about opening bank accounts for minors, and understanding the difference between joint accounts with minors and UGMA /UTMA custodial accounts.

Opening a Bank Account with a Minor

There are no federal guidelines regarding checking accounts for minors. States, though, might have their own laws. Before opening a bank account for a minor, make sure you understand the state law. Additionally, realize that some states let the banks decide their own policies. There might be age requirements, or there might be requirements that you open the account jointly. In some cases, your child might be able to open a solo bank account at the age of 16.

Consider the options, and decide what would work best for your situation. In some cases, it might best to start out with a joint account. That way, you will have access to the account and the account statements. This will make it easier to keep tabs on what your child is doing with his or her money, and you will be able to guide him or her more readily. Find out whether the financial institution has special teen or student accounts that provide special perks and no fees for young account holders.

Another item to consider, especially if the bank or credit union allows your child to have a debit card and/or ATM card, involves overdrafts. In order to avoid fees (and teach poignant lessons about budgeting and tracking expenditures), many parents choose to waive the standard overdraft services. This way, if your child tries to buy something he or she doesn’t have money for, the transaction will be denied. This can be a good way to keep your child from racking up overdraft fees.

UGMA/UTMA Custodial Accounts

Laws have been passed regarding custodial accounts for children. These types of accounts are quite specific regarding what the child is entitled to. UGMA and UTMA were enacted to allow for the transfer of money gifts to minors (UGMA), as well as to allow them to receive other types of assets and property and allow a young investor to get started with various securities (UTMA). A UGMA/UTMA custodial account is meant to provide the child with protection and use of the money.

A custodian (probably you) would be able to spend money not considered parental obligation – clothing, food, shelter – for the benefit of your child, but your main purpose is to help your child’s assets grow. A custodial account becomes the sole responsibility of the child when he or she reaches a certain age – usually 18 or 21, depending on the state. Once the child has full control of the account, you are no longer needed to be a custodian of the account.

Understand that money that goes into any sort of UGMA/UTMA custodial account is considered your child’s, and irrevocable. If you try to revert the account to your ownership, you will owe the IRS back taxes on the earnings. And your child will have grounds to sue you due to your breach of fiduciary duty. This means that if a family emergency ensues, you can’t use the money for the family; with a joint account, it is easier to "borrow" money to plug holes. (Although you might have bigger problems if you have to raid your child’s savings.)

One of the main downsides to a custodial account is that you will not have control over how your child spends the money. Once he or she reaches the age at which the account comes under his or her control, it is possible to spend the money as one wishes. You might be disappointed to see how the money is spent. If you want to better direct your child’s later efforts, a 529 plan or some other type of vehicle might be in order.

A custodial account can allow your child the chance to learn about money, as well as about investing, while providing some protection, since the custodian has to make the actual transactions. However, you have to be aware of the disadvantages.

Bottom Line

No matter what you choose, an account at the bank or credit union is usually a good idea for children. It helps them better learn concepts related to money, and can give them valuable practice in making wise money decisions. And, since you are likely to have some access to the account – either because it is a joint account or a custodial account – you can help guide and teach your child more effectively.