Whether you're planning to create a savings account for your newborn or high schooler, a smart choice is to open the account in your child's name rather than yours. Doing so could potentially lead to more significant savings, thanks to circumstances related to taxation.
Structured aptly, the capital resting in such accounts could grow more substantially as it may qualify for a higher interest rate than what your account would offer. This strategy can save your expense at tax season while helping your child's balance grow more quickly.
Interest acquired on bank and credit union accounts is usually taxed as standard income. When a parent opens an account in their name or is the primary account holder of a joint account, the interest gets taxed at their tax margin. For most adults, this tax rate stands at at least 12%. In contrast, when the account is in your child's name, the interest is taxed at their rate, which may be significantly lower, or potentially even zero (for anyone earning under $11,925 by 2025).
The availability of savings accounts designed for children or teenagers gives you an advantage. These accounts, for which a parent/guardian is required to jointly own or be a custodian, come with unique terms and interest rates. Some of them offer extremely high interest rates, much higher than adult high-yield savings account rates.
For youth with modest savings, these accounts typically cap the balance eligible for top APY (Annual Percentage Yield) at around $500 or $1,000, adequate for many. A second youth account can also always be opened elsewhere, if needed. Larger deposits made for long-term growth may be better suited in a custodial investment account. These accounts, referred to as UTMAs or UGMAs, are crafted specifically for long-term investing.
Remember, all contributions to these long-term investment accounts are considered irrevocable gifts-you can't withdraw the money once deposited. Conversely, youth savings accounts usually let you retain full control of the funds as they are joint accounts.