How to open a CD for a child

A deposit slip (CD) can be a very low risk way to save for the short term. If your child has any savings they would like to invest, or if you want to set aside some money for them, you can open a CD on their behalf with a custodian account.

Opening a CD for a child can be a great way to teach your children about the importance and benefits of saving, without exposing their money to the risks of the stock market. If you want to save money for college, but there are alternative ways to do this that can be more tax and cost effective in the long run.

In this article, we will explain why you should open a CD for your child, how you can do it and explore some options.

Important outlets

  • You can open a deposit certificate (CD) for your child with a custody account. You can open a custody account online and then add CDs to it for your child’s sake.
  • Because CDs are such a low-risk investment, they can be a great tool for teaching kids about the importance of saving and investing.
  • If you are considering putting money aside for your child’s college education, a CD may not be the best way to do it. A 529 account, for example, offers tax-deferred growth and tax-free withdrawals as long as these are used for training costs. However, your child’s income from a CD will be taxed as income.

Open a proof of deposit (CD) for a child

Deposit certificates are some of the safest investments available. Not only is the return they pay guaranteed by the bank, but the money in them is also insured by the federal government against loss. This makes CDs an excellent first investment for children – a place where they can learn about the importance of saving and investing with very little risk.

It is relatively easy to open a CD for your child. To do this, you can use a custodian account. This is an account that a guardian (as a parent) checks on behalf of a minor (a person under 18 or 21, depending on the state). The custodian must approve all transactions for the account until the child becomes an adult, when all assets in the account are transferred to them.

Custody accounts are available in two basic variants: Uniform Transfers to Minors Act (UTMA) accounts and the older Uniform Gift to Minors Act (UGMA) accounts. Their main difference lies in the type of assets you can contribute to them, but you can open a CD for your child with any type of account.

To open a custodian account, you must first find a bank or brokerage firm that offers them. Most parents will start with their current bank. If your bank does not offer deposit accounts, do a quick search online and you will be presented with lots of options. Opening a custody account is a similar process to opening a regular bank account, but you will also provide your child with information.

Keep in mind that once you have opened a custody account for a child, you can not change beneficiaries. This means that the child you opened the account for is entitled to the money and you can not transfer the account to another child. So if you have three children and want to open CDs for each of them, you need three different custodian accounts.

The last step is to add CDs to the deposit account. If you have opened a deposit account with a bank or broker, log in to their online banking portal and you should be able to explore your CD options. Taking out a CD, from this point, is simply a matter of choosing the one that suits your child best.

Depending on your child’s age, you may want to involve them in certain parts of this process. Taking out a short-term CD (eg three months) can be a great way to explain basic investment concepts to children and teach them the importance of financial discipline. However, if you want to put money aside for their future, and especially to pay for college, there are some other investment options that can be more effective.

The adult who opens the account, usually a parent or guardian, has control over the account until the child reaches adulthood. Then the child becomes the legal owner of all the money in the account.

Alternative to a CD for a child

Although CDs offer a low-risk way to save for short-term goals, they are not as effective when it comes to saving for your child’s long-term future. If you want to start saving money to send your kids to college, for example, a CD may not be the best way to do it.

This for several reasons. One is that assets held in UGMA and UTMA accounts are considered student assets in the Free Application for Federal Student Aid (FAFSA). This means that if your child has a lot of money on a CD in a custodian account, this can reduce the amount of money they can receive in federal student aid.

Having the same amount of money in a 529 plan or a Coverdell Education Savings Account (ESA) can give your child access to more help. A 529 plan is the standard choice for parents who want to save money on education costs, in part because of the tax-deferred growth and tax-free withdrawals that these plans offer. You can not usually buy a CD in a 529 plan, but you can roll some CDs in them.

Another option is a Roth IRA for children. This can be a good option if your children are making money and want to invest them for a long-term future. Contributions to these accounts may grow tax-free, but they may not exceed the amount the child has earned in one year. There are also annual grant limits – for 2022, the annual IRA grant limit is $ 6,000. FDIC-insured CDs are among the many investment choices that a Roth IRA account can accept.

Can I open a CD for my child?

Yes. You can open a custody account for your child and then add a deposit slip (CD) to it. When your child grows up, it becomes the legal owner of all the money in the account.

Why should I open a CD for my child?

Certificates of deposit (CD) are some of the safest investments available, and can therefore be a good way to teach children about saving and investing. You can even include your children in the process of opening and managing their CD account. If you want to save money sending them to college, a CD may not be the best way to do it.

Can I use a CD to save for college?

You can, but there may be better options. A 529 account, for example, offers tax-deferred growth and tax-free withdrawals as long as these are used for training costs. Your income from a CD will, however, be taxed as income.

The points

You can open a deposit certificate (CD) for your child with a custody account. You can open a custody account online and then add CDs to it for your child’s sake. Because CDs are such a low-risk investment, they can be a great tool for teaching kids about the importance of saving and investing.

If you are considering putting money aside for your child’s college education, a CD may not be the best way to do it. A 529 account, for example, offers tax-deferred growth and tax-free withdrawals as long as these are used for training costs. However, your child’s income from a CD will be taxed as income.

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