Congratulations! The stork just delivered a bouncing baby boy or girl. But alas, the big-beaked bird failed to deliver advice on how to save money for your new arrival. So, what about opening a baby bank account?
“It’s a great idea,” says Judith Corprew, executive vice president and chief compliance and risk officer at Patriot Bank. “Compound interest does best with a very long runway. If you start even by socking away $5 or $10 a week, the power of growth will do wonders, but it is also an opportunity to indoctrinate children into understanding how to save for their future.”
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How to Open a Savings Account for a Baby
As with any type of savings account, you’ll need some information and paperwork to get started. Your checklist should include:
— Your name.
— Your baby’s name.
— Your ID, such as your driver’s license or another type of identity verification.
— Your baby’s birth certificate.
— A place to open the account. You might select your current bank or credit union, or you might opt for an online bank. Pay close attention to the annual percentage yield to maximize the interest the account earns.
— Funds to make a minimum deposit or maintain a minimum balance. Ideally, you should pick an account that requires neither a minimum deposit nor a minimum balance.
Once you’ve got all your information and paperwork in order, it’s time to open the account. You may want to visit a branch to get help setting up the account, since opening a baby savings account isn’t the same as opening a traditional account. However, you may be perfectly comfortable opening the account online or over the phone.
If you want to open an account before your baby is born, you can do that, but it’ll be under your name and your Social Security number. Once your child has arrived, your financial institution can adjust the account to add your baby’s details.
[Read: Best CD Rates.]
The Pros and Cons of a Baby Savings Account
[Read: Best Money Market Accounts.]
Baby Savings Accounts Alternatives
If you’re not sold on opening a savings account for your newborn, consider these alternatives.
— 529 plan. A 529 plan is a special savings account for education-related expenses such as tuition, meals and computers. It provides investment growth and tax advantages that are similar to retirement accounts.
— CD. A certificate of deposit may be another alternative to a savings account for a baby. You can open a CD as a custodial account, meaning you’re the custodian but your child is the account holder. One advantage of a CD is that it might pay a higher interest rate than a savings account, but one drawback is that you may be hit with a financial penalty if you withdraw money from the CD before the end of the term.
— Investment account. An adult can open a custodial brokerage account at a bank or brokerage firm to invest money on behalf of a child. One investing option may be an index fund. This is an investment vehicle tied to a certain index, such as the S&P 500. The S&P 500 is based on the stock values of 500 large companies, so the fate of your child’s money would be tied to the performance of the index. As of mid-April 2024, the S&P 500’s 10-year annualized return was 13%.
— Roth IRA. Another type of custodial account you can open for a child is a Roth IRA. A parent or another adult must initially manage the account, but the child can take over when they reach the age of majority (normally 18). At that point, it’ll be converted into a Roth IRA in the child’s name. Roth IRA contributions are made with after-tax dollars, but the funds grow on a tax-free basis.
Baby Savings Accounts vs. Child Savings Accounts
Baby savings accounts and child savings accounts are essentially the same.
By law, a minor can’t open a savings account. Instead, a parent or guardian must set up a custodial savings account or joint account for a minor child.
A custodial account belongs to the child, but an adult oversees it until the child is old enough to do it on their own (typically age 18). Meanwhile, both a child and adult have access to a joint account, although the adult can restrict account activity until the child reaches a certain age.
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The Basics of Baby Savings Accounts originally appeared on usnews.com
Update 04/24/24: This story was previously published at an earlier date and has been updated with new information.
