Can a Baby Have Their Own Bank Account?

A baby cannot open a bank account directly in their own name because minors lack the legal capacity to enter into contracts. However, adults can establish and manage accounts on a child’s behalf. This provides a structured way to save money for their future, helping build a financial foundation for long-term goals like education or other significant expenses.

Understanding Accounts for Minors

Minors cannot independently open bank accounts as they are not legally competent to enter into binding financial contracts. This legal principle protects children from potential financial liabilities. To address this, legal structures allow adults to manage assets for a child’s benefit.

The most common types of accounts established for minors are custodial accounts, governed by either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These acts allow an adult, known as the custodian, to hold and manage assets for a minor beneficiary without the complexities of a formal trust. UGMA accounts are typically limited to financial assets such as cash, stocks, bonds, and mutual funds. In contrast, UTMA accounts offer broader flexibility, permitting a wider range of assets including real estate, intellectual property, and works of art.

While custodial accounts are for general savings and investment, other account types serve different purposes. Joint bank accounts, where a minor is a co-owner with an adult, are less common due to the adult’s primary control and potential tax implications. Similarly, 529 education savings plans are specifically for qualified educational expenses, differing from the general-purpose nature of custodial accounts.

Steps to Open a Custodial Account

Opening a custodial account requires specific information from both the custodian and the minor. The adult custodian will need to provide:
Full legal name
Current address
Social Security Number (SSN)
Date of birth
Valid government-issued identification (e.g., driver’s license or passport)

For the minor beneficiary, their full legal name, date of birth, and Social Security Number are required. A birth certificate is commonly used to verify the minor’s identity.

The process begins by selecting a financial institution that offers custodial accounts, such as a bank, credit union, or brokerage firm. Consider factors like account fees, interest rates, and accessibility. Once chosen, the custodian completes an application, which can often be done in person or online. The custodian will sign the necessary forms, formally establishing the account for the minor.

Managing Funds and Transfer of Control

The adult custodian manages the account on behalf of the minor. The custodian has a fiduciary duty, meaning they are legally obligated to manage funds prudently and solely for the minor’s benefit. This includes making investment decisions and ensuring all expenditures are used for the child’s welfare, such as education, healthcare, or general support, not for the custodian’s personal expenses. Assets transferred into a custodial account are irrevocable gifts to the minor.

When the minor reaches the age of majority, the control of the custodial account automatically transfers to them. This age typically varies by state, commonly being 18 or 21, though some states permit UTMA custodianships to extend until age 25. At this point, the former minor gains full legal control over the assets and can use them as they deem fit, regardless of the custodian’s original intentions.

Tax considerations, particularly the “Kiddie Tax,” can apply to unearned income generated within custodial accounts. If a child’s unearned income exceeds a certain threshold, the Kiddie Tax rules may apply. A portion of this unearned income is generally tax-free. The next portion is taxed at the child’s tax rate, while any unearned income above these thresholds is taxed at the parent’s marginal tax rate. Parents may need to file IRS Form 8615 or elect to report the child’s income on their own return using Form 8814.