Teaching your child to save money can provide them with a life lesson they can grow with. While there are many ways to have your child save money, in an old shoe box or in a piggy bank, you could take it even further by showing them how to see their money grow within their very own savings account. Guest author Celeste Whitehead shows us how!
The key to finding and opening an account for your child is typically the same way you would go about finding a bank for yourself. You could even check with your bank to find out if they offer a savings account that would fit what you are looking for, for your child.
Do not settle on just one bank, compare and see what other banks have to offer as well. Look for what the minimum amount needed to open the account and what fees are required. Depending on the age of your child you should make sure they are involved in the process.
You will have to inform the bank that you (as the parent) will be the director of the account. What this means is that until your child is 18 years of age they will have to have you as the director of the account and make any and all decisions on the account. Once they come of age the responsibility of the account is given over to your child (this is when all your teachings on being financially responsible will take hold).
Be sure to make a physical visit to the bank with your child. The will allow them to see how the entire process works and sign any bank forms needed to open their account. As the parent and the director of the account you will also need to sign the appropriate forms.
You will need to bring the required forms to open the account, child’s date of birth, social security number, address and phone numbers. If you do not have an account at the bank you may also be required to provide the same amount of information.
Since you have to deposit the minimum amount of money required to open the savings account you can use this time to show your child how to fill out a deposit slip. You can even let him give the deposit slip to the teller and once you get the receipt the savings account has been successfully opened and will be able to start earning interest.
Easy to setup. These accounts are easy to setup, as stated above, you can simply contact a bank for help setting it up.
You can deposit as much money as you want and grandparents, godparents and other family members can do the same.
Note: Amounts that equal to over $12,000 then that money will be subjected to a gift tax.
The safety factor is a big one. Once the money is put into this account no money can be withdrawn without the consent from the parent or guardian.
Educational benefit. Of course there is a number of life lessons going on here that go way beyond teaching basic financial responsibility.
Once permission is give from the parent or guardian it can be withdrawn any time regardless of the reason. Depending on the plan some will only allow money to be withdrawn for expenses for college.
What Are The Disadvantages of A Custodial Account?
Many make the mistake of thinking that opening up this kind of account is pretty cut and dry but there are some disadvantages that are not always mentioned. Some of those include:
Your child may have to file taxes. If the income in the account is over $1000 than a tax return must be filed and your child may owe money. These accounts are often heavily taxed every year even when you take money out.
So if you are looking to save for college you may want to look to getting a 529 college savings account.
Note: 529 Plans are education savings plan created to help families save up money for college and future costs for college. If the plan meets certain requirements, federal tax laws would provide a special tax benefit.
Issues with Financial Aid. When it comes time to fill out financial aid money in this account is counted as part of the students assets which could in turn impact their application. This means that they could get less financial aid money for school.
Money belongs to the child. While this is generally the entire purpose of setting up the account, you should know that the money in this account belongs to your child. Yes you are the manager of the account but legally it can only be used for situations that will benefit the child and that child only. You cannot even take money out of the account to open up an account for another child.
Guest author Celeste Whitehead is an independent contractor, freelance writer and owner of the blog, Organic Mommy Today. When she’s not busy chasing after her two young children, you can find Celeste contributing to the CareOne Debt Relief Services blog, a community that provides debt consolidation and money-saving advice.