The Best Children's Savings Accounts
The best way to teach your child financial responsibility is to start young. Instill the basic principles of saving, investing and compound interest by setting up a savings account in his name. Whether you go with a bank account, a CD or a college savings plan, he will quickly learn the importance of saving, and be more likely to be a future saver himself.
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Free Savings Account
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Start your child's journey of financial knowledge by opening a simple, standard savings account at your local bank. Make sure the account is free and pays some interest. Online savings accounts may offer a better rate than brick and mortar establishments. Ensure that your child does not incur fees by having too many transactions. Teach your child to deposit part of his allowance in his savings account and to watch how the money can quickly add up.
529 Plan
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The 529 Plan is a state-sponsored investment vehicle in which you deposit money for your child to use later for college expenses. You retain control of the account, determine how much to invest and the earnings and principle are not taxed as long as he uses the money for educational expenses. You can deposit up to $12,000 a year and avoid the gift tax. Most plans are designed to use the first few years of the child's life to invest in stocks and gradually switch over to bonds as the child ages. An additional benefit of the 529 plan is that you can use it on another relative. So if your older daughter decides not to go to college, you can pass the plan along to her younger brother.
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Coverdell Education Savings Accounts
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Although you can not use a Coverdell Education Savings Account as a deduction, the amount of money you put into the account grows tax free. Every year you can deposit up to $2,000 for elementary, secondary or college educational expenses. If your child uses the funds for tuition and fees, she will not owe taxes on the distribution.
Fixed-term Savings Account
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A fixed-term savings account differs from a traditional savings account because the deposit is not accessible for a specific duration of time. You set a fixed term, such as two or five years, and the money is tied up during that period of time and prevents you from making any withdrawals. The benefit of this type of children's saving account is that you will earn a higher interest rate on your deposit.
Certificate of Deposit
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CDs are a safe way for a child to begin investing. He can pick the term and deposit amount safely since CDs are FDIC insured. When the CD matures, he will receive the principle and interest. Alternatively, he can pick a CD that pays him interest during regular intervals, thus learning how he can make money from his own money.
Prepaid Tuition Plans
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Prepaid tuition plans allow you to pay future tuition to an in-state college at the current tuition rates. In this manner, you lock in the current tuition rates and avoid paying thousands of dollars in the future. The funds must be used for tuition and fees and you or your child must be a resident of the state where you are prepaying tuition. Most states guarantee the plan.
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References
- IRS.gov; Coverdell Education Savings Accounts; March 2008
- Baby Center; Saving for College: 529 Plans; August 2007
- DoughRoller: Best Savings Accounts to Help Teach Children Financial Responsibility
- "nvestment Basics"; Types of Children's Savings Accounts; Sarah Bennett; 2010
- U.S. Securities and Exchange Commission: High-Yield CDs ? Protect Your Money by Checking the Fine Print
- FINRA: College Savings Options
Resources
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