Accounts for children

Many parents are interested in teaching their children about personal finance. While it is possible for parents to use accounts at financial institutions as instruments in the service of personal finance education, some account types enable the beginning of a journey towards retirement savings.

There are two distinct choices of account type that a parent needs to consider: savings accounts and Roth IRA accounts. Savings accounts themselves breakdown into Joint accounts and Custodial accounts. The choice of the account type depends on what the parent is trying to teach the child, the age at which the parent wants the child to have access to the funds, the amount of savings and the amount of documentation that the parent is willing to maintain and process.

Kids Savings Account Types
The key differences between the Joint Savings Account and Custodial Savings account are summarized in the table below:

Other features of the account such as electronics fund transfer (EFT) access, minimum balance and monthly fees depends on the financial institution providing the account.

Custodial Savings Account vs Custodial Roth IRA Account
Custodial Savings account and Custodial Roth IRA accounts differ in the same way as non-custodial savings accounts differ from Roth accounts. However, there are some additional differences that a parent needs to be cognizant of prior to choosing one account over the other.

Steps for Custodial Roth IRA

 * 1) The parent opens a Custodial Roth IRA account with the parent as the custodian. Several financial institutions including Schwab, Fidelity and Vanguard offer Custodial Roth IRA accounts
 * 2) The parent (or child if able) records the source, date and amount of income. If the income is recorded on a W-2 or 1099, this step may not be necessary. On the other hand if income is not recorded formally on a W-2 or similar document, detailed records are necessary in case of a future audit or notice from the IRS
 * 3) The parent periodically transfers funds to the Custodial Roth IRA account, upto the Roth IRA limit or the child's earned income, whichever is lower. The parent can transfer the money via check or EFT from their account to the Roth IRA if the financial institution allows it. Alternatively, the parent can open a Kids Savings Account and link that account to the Roth IRA account for periodic transfers. Several banks including Capital One, Ally and Bank of America allow parents to open a Kids Savings Account
 * 4) The parent files a tax return on behalf of the child