Can I Open a CD in My Child’s Name? How It Works and What to Know
Learn how to open a CD for your child, manage custodial accounts, handle tax implications, and plan for future withdrawals with informed decision-making.
A certificate of deposit (CD) can be a secure way to save for a child’s future, offering predictable returns with minimal risk. Many parents and guardians open CDs in a child’s name to set aside funds for education, major life events, or general savings. However, specific rules apply regarding account ownership, tax implications, and withdrawal restrictions.
Understanding how CDs work in a child’s name is essential before making a decision. Different ways to structure the account come with their own benefits and limitations.
Custodial Arrangements
Opening a CD for a minor typically requires a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts allow an adult—usually a parent or guardian—to manage the funds until the child reaches the age of majority, which varies by state but is generally 18 or 21. While the custodian controls deposits, withdrawals, and reinvestments, the money legally belongs to the child.
Financial institutions require both the custodian’s and the child’s Social Security numbers when opening the account. Any interest earned is considered the child’s income for tax purposes. Some banks may impose restrictions, such as minimum deposits or early withdrawal penalties. Policies vary, so checking with the bank beforehand is important.
Transfer Guidance
When a custodial CD matures, ownership transfers to the child upon reaching the age of majority. The financial institution typically converts the custodial account into a standard account. If the CD has not matured, the child can either let it continue or withdraw the funds, though early withdrawal may result in penalties.
Banks generally require documentation for the transfer, such as identification, proof of age, and completed bank forms. Some institutions automatically roll the CD into a new term under the child’s sole ownership if no action is taken, which may limit access to the funds. Reviewing bank policies in advance helps avoid complications.
If the child is not ready to manage the funds, they can reinvest in another CD or transfer the money into a different savings or investment account. A Roth IRA is an option if they have earned income, while a high-yield savings account offers more flexibility. Planning how to use the funds can help maximize growth while maintaining access when needed.
Income Reporting
Interest earned on a custodial CD is considered unearned income for tax purposes and must be reported to the IRS. The first $1,300 of a child’s unearned income is tax-free under the Kiddie Tax rules for 2024, while the next $1,300 is taxed at the child’s rate. Any amount over $2,600 is taxed at the parent’s rate, which can be significantly higher.
If interest exceeds $1,300, the child must file a tax return using IRS Form 8615. Parents can opt to include the child’s income on their return using Form 8814, but this is only allowed if total unearned income does not exceed $12,500. While this simplifies reporting, it may result in a higher tax bill since the income is taxed at the parent’s rate.
Banks issue a Form 1099-INT if interest earned exceeds $10 in a tax year. This must be included in the child’s tax filing, as the IRS receives a copy and expects the income to be reported. Failing to disclose this income can lead to penalties and interest charges. Parents should monitor CD earnings annually to ensure compliance.
Maturity and Withdrawals
When a CD matures, funds become available for withdrawal or reinvestment. Banks typically provide a grace period—usually 7 to 10 days—during which account holders can decide whether to withdraw, renew, or transfer funds without penalty. If no action is taken, many banks automatically roll the balance into a new CD with a similar term, which may not align with financial goals or interest rate changes.
Withdrawing funds before maturity usually incurs an early withdrawal penalty, which varies by institution and CD term length. Short-term CDs may impose a penalty of a few months’ worth of interest, while longer-term CDs can result in forfeiting a year or more of earned interest. Some banks offer no-penalty CDs, which allow early access to funds without a fee, though these typically come with lower interest rates. Weighing the trade-offs between flexibility and returns is essential when selecting a CD.