Making the Most of Your Kid’s Savings

By Tanner Doudna

Parents often ask us what type of account is good for their child’s savings. Whether they’ve received birthday money, chore money, etc. we think it’s wise to put their cash to good work. A piggy bank is a wonderful visual for them to practice the act of saving, but as I’ve seen with my youngsters, it’s not always the safest method. I’ve seen my children so proud of their “hard-earned cash” that they just want to carry it everywhere because they are doing something BIG, which can often lead to tears and wondering where the money went. Also, I doubt I’m the only parent who’s had to deal with some “sibling co-mingling”.

I personally think that the most important factor with setting up an account for each child is to keep it separate / stay organized. It can take some world-class recordkeeping if you are putting their savings in your bank account. I think the next most important factor is the intended purpose of the funds. Is this money that won’t be used for 5+ years? Are they going to be spending it in the near future? Here are some ideas to consider:

An Online Savings Account

For money that you don’t want lose, but you’d like to get some interest, I like the idea of a high-yield savings account. They are currently only yielding around .50%/yr (they were above 2%/yr in early 2020), but something is better than the .01% most big-name banks offer. Synchrony Bank, Ally Bank, and Capital One are some banks with good options.

A Brokerage Account (UTMA)

For a long time, I just kept my kid’s savings in a high-yield online bank, but then I reconsidered the purpose of the money they had in those accounts. At the earliest, the money would be used for a car. So, I decided it would be wise to invest their savings in hopes to grow the account faster than the savings account. UTMA’s can be opened just about anywhere, but Charles Schwab and Fidelity are two great options. Note: once the money is in this type of account, it is technically the child’s.

A Custodial Roth IRA

This Roth IRA is in the name of your child, but has to be a custodial account while they are a minor. In order to get money into this type of account, your child has to have reported earned income. Most children do not have reported earned income, but if you do, I can’t think of a better tool. They are getting money into a Roth IRA that will never be taxed again. They can always pull out the contributions penalty-free in case they need it for a car/house/etc. My older kids have earned income and we file their own tax return to report that income. This can be a tedious process, but I find that it’s worth it.

Checking Account

For money that will be used in the short-term, many banks offer a checking account for kids. I personally bank at Chase because of the proximity to my home and they offer an account for kids (6+) which comes with a debit card. Know that they won’t earn any interest on this type of account, but it’s a much safer place to store their cash than a piggy bank.

Series i Savings Bonds

An investment vehicle that was little known until recently whose popularity has grown hand-in-hand with inflation, is also known as “i Bonds”. These are not held in your typical brokerage account, but are kept as either paper bonds or electronically with TreasuryDirect. The largest purchase you can make each year is $10,000. The current rate until May of 2022 is 7.12%, but this will be adjusted every six months according to inflation. You must hold them for at least a year and there are early withdrawal penalties (similar to CDs) for redeeming them within a 5-year timeframe. If the bond is used to pay for qualified higher education expenses, you can avoid paying taxes on the interest. While these seem very attractive at the moment, keep in mind they can eventually fall back to pre-COVID rates (remember: they are tied to inflation) of 1% or less.

College Accounts (529 or Coverdell ESA)

These accounts will allow the money to be invested in the market and the growth won’t be taxed if the money is used for qualified higher education expenses. I encourage you to be thoughtful about what money you are putting in here because you don’t want money that should be set aside for purchases (like car/house/etc.) to be tied up in an account meant for college.

If you have any questions about these options, contact your TrustWell Financial Advisor and they will be happy to go into more detail!