When it comes to teaching children and teenagers financial skills, the education system often lacks this aspect. Fortunately, parents or guardians can help young people gain real experience with money and financial transactions in the real world. One way to do this is to allow them to use real money in their own bank accounts.
What to Consider Before Opening a Bank Account for a Minor
Before opening a bank account for a minor, you should start by looking at the big picture. What are you trying to achieve by opening an account? Do you want to help your child understand money, save for specific goals, spend money using plastic cards or electronic payments, or something else? With a specific goal in mind, it becomes easier to choose accounts that fit you and your child.
Types of Bank Accounts for Minors
When opening a bank account with a minor, you have several options, which depend on the financial goals you and the minor are trying to achieve. Here are some examples of accounts that may be suitable, providing knowledge on everything from basic saving to investing.
Joint Accounts
If the goal is for the minor to use the account, for example, by depositing and withdrawing money and making purchases with a debit card, a joint account may be a good option. Banking accounts marketed as “children’s bank accounts” are usually joint accounts, although they may have different names. For example, the “MONEY Account for Teens” from Capital One is a joint checking account available for all kids aged 8 and above.
Custodial Accounts
Custodial accounts are accounts opened and managed by adults on behalf of the child, allowing adults to save and invest money on behalf of the child. Unlike joint accounts that allow children to spend and withdraw money, the adult is the only one with the authority to manage the custodial account. However, the money returns to the child.
Educational Accounts
In addition to basic banking accounts, there are several accounts available for educational expenses. These accounts may have tax benefits, making it easier to shoulder the burden of tuition costs. Some options include:
- 529 College Savings Plans: 529 College Savings Plans allow you to contribute to an account and spend money without incurring taxes on educational expenses, as long as you meet the relevant tax laws. These expenses include higher education as well as $10,000 per year for elementary and secondary school tuition. You can make significant contributions to these accounts, making them powerful means for saving for the future.
- Coverdell Education Savings Account (ESA): This account can also help you pay for educational expenses using tax-protected funds. However, not everyone is eligible to contribute to an ESA. Additionally, the maximum annual contribution is relatively limited, so you may need to start early and supplement these funds with other sources.
Prepaid Cards
If your main goal is to enable card payment, prepaid cards are another option. However, prepaid cards are often expensive and do not offer much compared to checking accounts. Teen and children’s bank accounts may be fee-free (or provide temporary fee waivers), so a bank account may be a better option.
Pros and Cons of Opening a Bank Account for a Minor
Pros
- Hands-on experience with money: A bank account provides children with a valuable opportunity to engage with personal finance concepts. While you can try to explain abstract topics in real life – during shopping trips, for example – there is no substitute for allowing the child to experience everything firsthand. They can enjoy the
Source: https://www.thebalancemoney.com/bank-accounts-for-people-under-18-315365
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