Updated: Dec 1, 2021
Nowadays it is a must to have a bank account and it is never too early to start saving money and teaching kids how to manage income and expenses.
For people under the age of 18, opening a bank account is not easy. Minors need to sign a contract to open an account with a financial institution and a contract signed by minors is very complicated in case of disputes between them and the bank in cases of dispute between the bank and a minor. As a result, many banks do not open accounts for anybody under age of 18.
However, there are several ways to open an account for somebody under 18.
The details vary from state to state and from bank to bank (so ask your bank’s customer service department for specifics), but the most common solutions are below.
You can open an account with at least one adult as an account holder. These accounts have different names like:
Teen Checking Account
Kids Saving Account
Looney Toons Account
These are good options if the minor is going to use the account for making deposits, purchases with a debit card, and cash withdrawals.
In most cases, the adult needs to be a family member or legal guardian. But exceptions do exist (for example the bank Capital One allows anybody to be the Joint account owner).
If you choose to have a standard Joint account, each account holder will have 100% access to the funds. The adult or child can drain the account and rack up overdraft fees. You don’t want your hard-earned money to disappear so be sure that you trust your child with a large available balance.
You can also Institute account protections to prevent problems on joint accounts. For example, require that withdrawals from the account have signatures of both joint-owners instead of just one signature.
Parents can set up text or email alerts. They may even be able to set spending limits on debit cards.
Also, be sure to learn the bank’s rules on what happens to the account once your child turns 18. Will they be able to continue making withdrawals and spending?
The IRS recommends that you place your minor child’s name first as the account owner and your name second. You must also list your child’s SSN for Tax purposes and any interest earned from this money is taxable to the minor child.
A custodial account is savings account accessible through a financial institution, mutual fund company or brokerage firm that an adult controls for a minor under the age of 18, depending on state laws.
In this case, the minor is not involved with money management, but legally the account belongs to the child and any deposit made to the account is an irrevocable gift.
There are two types of custodial accounts:
the Uniform Transfers to Minors Act (UTMA) and
the Uniform Gift to Minors Act (UGMA).
The UTMA allows parents to postpone distributions, but age limits vary by state. However, the UGMA allows parents to give funds to their child in the form of money, life insurance, savings bonds, stocks or annuities.
There are no income limits, contribution limits or withdrawal penalties. However, any amount over $14,000 is subject to a gift tax.
Custodial accounts have enormous flexibility. For instance, withdrawals from a custodial account may also occur for any purpose — not just for education — without penalty. Managers can also invest in virtually any securities or funds.
Although withdrawal rules vary by state, they are subject to tax at the minor’s tax rate. Based on the age requirements for the minor, a portion of unearned income is tax-free. The remaining portion is taxable at the child’s tax rate or the parent’s federal tax rate.
As of 2017, the first $1,050 of unearned income was tax-free for individuals under the age of 19 or under 24 for full-time students. If another $1,050 of income was applied, it was taxed at the federal tax rate of the individual, and unearned income of more than $2,100 was taxed at the federal tax rate of the custodian.
A parent must file a tax return for his/her child until the child reaches the age requirement for the transfer of account ownership.
Earnings and dividends are subject to tax at the minor’s rate starting at age 18. Minors under the age of 18 are taxed on a specific portion of earnings and dividends on the account, and the remaining portion is subject to tax at the parent’s rate.
If the minor earns income, he must file his own return. Depending on the amount of unearned income, claiming the income could move the minor into a higher tax bracket.
In addition to bank accounts, several accounts are available for education costs.
529 Plans: College savings plans allow you to contribute to an account and assuming you follow all of the relevant tax laws, spend the money tax-free on higher education expenses.
Higher education can include trade schools, overseas institutions, room and board, and other costs for college or graduate school. You can make significant contributions to these accounts, so they are a powerful way to save for the future.
Coverdell education savings accounts (ESA): For other education expenses, such as elementary school tuition, an ESA might help you build up funds you need.
These accounts can also be used for college. However, not everybody is eligible to contribute to an ESA, and the maximum annual contribution is fairly low — so you’ll need to start early.
Where to open an Account
Any bank or credit union will offer the accounts described above, so you need to shop around for the features that are most important to you. Keep in mind that accounts might be not as simple as advertised. So, do your research before opening an account for your child.