Can I Open a High-Yield Savings Account for My Child?

Opening a high-yield savings account for a child is a strategic financial move, allowing funds to accumulate for their future with higher interest rates. These accounts offer better returns than traditional savings options, helping savings grow substantially. Establishing such an account can teach children about financial responsibility and the power of compounding interest from a young age. It serves as a dedicated place for gifts, allowances, or other contributions, supporting future financial goals.

Custodial Accounts for Minors

The most common method for holding assets for a minor is through a custodial account, established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These state-specific laws provide a legal framework for adults to gift assets to minors without a formal trust. A designated adult, known as the custodian, manages the account on behalf of the child.

The custodian maintains full control over the account’s assets, making investment and withdrawal decisions for the child’s benefit. This management continues until the child reaches the age of majority, which ranges from 18 to 21 years old, depending on state law. Once the child reaches this age, they gain complete control over all assets. The primary advantage of these accounts is their simplicity compared to trusts.

Custodial accounts allow for a wide range of assets, including cash, stocks, bonds, and mutual funds. This enables diverse investment strategies for long-term growth, such as for higher education or a down payment on a home. Funds within these accounts are irrevocable gifts, meaning once contributed, they legally belong to the child and cannot be reclaimed by the donor.

Joint Accounts with a Minor

An alternative to a custodial account is establishing a joint savings account where an adult and a minor share ownership. In this arrangement, both the adult and the minor have direct access and control over the funds. This differs significantly from a custodial account, where only the adult custodian has management authority until the child reaches the age of majority.

While a joint account might seem straightforward, it carries distinct implications regarding access and legal ownership. Both parties possess equal rights to deposit and withdraw funds, which can present challenges as the child matures. For instance, the minor could access and spend the funds without the adult’s consent, or vice versa.

This account type might be considered for specific, short-term savings goals where immediate shared access is desired. However, for long-term savings intended solely for the child’s future, such as college expenses, a joint account may not offer the same control and protection as a custodial account. Shared ownership can complicate matters, particularly if disagreements arise or if the adult wishes to maintain exclusive control until the child reaches a certain age.

Tax Implications of Savings for Children

Interest earned on a child’s savings account is considered unearned income and is subject to specific tax rules, known as the “Kiddie Tax.” For the 2025 tax year, the first $1,350 of a child’s unearned income is tax-free. The subsequent $1,350 of unearned income is taxed at the child’s own marginal tax rate.

However, any unearned income exceeding $2,700 for the 2025 tax year is taxed at the parent’s marginal tax rate, rather than the child’s lower rate. This rule prevents parents from shifting significant investment income to their children to avoid higher personal income taxes. The child’s Social Security number is required for reporting interest income to the Internal Revenue Service (IRS).

Parents can report their child’s interest and dividend income on their own tax return using IRS Form 8814 if the child’s gross income is less than $13,500 in 2025 and consists only of interest and dividends. Otherwise, if the child’s unearned income exceeds the threshold, the child must file their own tax return with IRS Form 8615. Gift tax considerations may also apply for substantial transfers of funds, though annual gift tax exclusion limits allow for significant amounts to be gifted tax-free each year.

Preparing to Open an Account

Before opening the account, gather necessary documentation and make informed decisions. You will need specific personal information for both the adult and the child, including the child’s full legal name, date of birth, and Social Security number.

For the parent or guardian opening the account, current identification, such as a driver’s license or state-issued ID, will be required, along with their Social Security number. Current address information for both parties is also needed. Selecting the appropriate account type, whether a custodial account (UGMA/UTMA) or a joint account, should be a primary consideration based on your long-term goals for the funds and desired control.

Research various financial institutions that offer high-yield savings accounts. Compare interest rates, account fees, and minimum balance requirements to find an option that best suits your financial objectives. Understanding these details beforehand ensures a smoother account opening experience.

The Account Opening Process

Once all necessary information and decisions are in place, proceeding with account opening is the next step. Most financial institutions offer the convenience of opening high-yield savings accounts online, typically through their secure application portal. Alternatively, you may visit a local branch in person or complete the process via mail, depending on the bank’s options.

The application usually requires inputting the gathered personal details for both the adult and the child. You will also be prompted to make an initial deposit to fund the account, often through an electronic transfer from an existing bank account or by mailing a check. After completing the digital forms and providing initial funding instructions, you will typically review and electronically sign consent forms and agreements.

Upon successful submission, expect to receive a confirmation email or a physical welcome kit within a few business days, detailing account information and next steps. This kit often includes instructions for online access, information on how to make future deposits, and details regarding account statements.