Opening a savings account for a baby can seem like a good way to start a child off on a successful financial path. You begin to build a little nest egg for Junior and hopefully, as the little one grows, can teach good savings habits. It’s certainly not the only option available to begin building wealth for a baby, but it is one of the simpler ones. The most important step can be doing some research to figure out which type of account to open and where to keep your baby’s savings — which is something we can help with!
Why Open a Savings Account for a Newborn
There are actually some very good reasons to consider opening a savings account for a baby. You might be wondering why someone would open this kind of account for a newborn. After all, they don’t have any bills or expenses to pay so what would they need to have money in the bank for? Consider how opening an account and saving for a baby can have real benefits:
• Time is on your side. Compounding interest can help you grow your baby’s savings account over time. The younger your child is when you start saving, the longer that money has to earn compound interest.
• Plan for specific goals. Opening a savings account for a baby can make it easier to fund long-term goals. For example, you might want to set aside money to help them buy their first car or pay for college when the time comes.
• Tax advantages. Savings accounts may not be earning a lot of interest right now. Still, the fact that babies usually don’t typically earn enough dough to pay taxes is a bonus.
• Increase financial literacy. Teaching kids about saving from an early age can help them get into the habit. By opening a savings account for them when they’re young, you can help them learn the money skills they’ll need as adults.
Kids’ savings accounts can also be appealing because they tend to have low initial deposit requirements, low minimum-balance requirements, and low fees. So you don’t need a lot of money to start saving on behalf of your newborn — and you may not have to worry about paying a lot of fees to maintain the account as they grow.
How to Open a Savings Account for a Newborn
Opening a savings account for a baby isn’t a complicated process. To open a savings account for a newborn, you’ll need the following (and we’ll share more details in a minute, too):
• Information about yourself
• Information about your baby
• Required documentation
• Minimum initial deposit and funding details
You should be able to open a savings account for a baby either online or at a branch of a bricks and mortar bank or credit union. You’ll need to fill out the savings account application and provide the deposit via check, money order, cash or ACH transfer if you’re opening an account with an online bank. The minimum deposit may be as little as $1 or even $0, though some banks may require a larger deposit to open a baby savings account.
Keep in mind that some banks may require you to have an account of your own before you can open a savings account for a child. That could influence where you decide to set up a savings account for a newborn.
Also look into any account maintenance fees that may be assessed monthly. You don’t want fees eating up the principal and interest in the account. Let’s look at this a little more closely next.
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Which Savings Accounts Are Best for Newborns?
The best savings accounts for newborns are ones that allow you to save regularly, earn interest, and avoid high fees. You might look to your current bank first to open a savings account for baby. Consider what type of features or benefits are offered. If you have to pay a monthly service fee, for example, you may be better off considering a savings account for a newborn at an online bank instead.
Online banks can offer the dual advantages of higher interest rates on savings and lower fees. You won’t have branch banking access but that may not be important if you prefer to deposit money via mobile deposit or ACH transfer anyway. And once your child gets a little bigger, you can introduce them to the world of mobile banking and how to manage it on their own.
Also, consider how well a newborn savings account can grow with your kid’s needs. Some questions you might ask: Can you switch the account to a teen savings account or teen checking account down the line? Could you add a prepaid debit card for teens into the mix at some point? Asking these kinds of questions can help you pinpoint the best savings account for a newborn, based on your child’s needs now and in the future. For some people, it can be a benefit to know that the bank has figured out ways to help accounts grow with their youngest customers and coach them along their financial journey.
Requirements for Opening a Bank Account for a Newborn
The requirements for opening a bank account for a newborn are a little different from opening a bank account for yourself. That’s because the bank needs to be able to verify your identity as well as the baby’s.
Generally, the list of things you’ll be required to provide to open a savings account for baby include:
• Your name and your baby’s name
• Dates of birth for yourself and the baby
• A copy of your government-issued photo ID
• The baby’s birth certificate
• Your address, phone number, email address, and Social Security number
The bank may ask for the baby’s Social Security number though it’s possible you may not have this yet at the newborn stage. And if you don’t have a Social Security number of your own, you may have to provide a substitute federal ID such as your Individual Taxpayer Identification Number (ITIN).
Alternatives to Newborn Savings Accounts
A savings account at a bank or credit union isn’t the only way to set aside money for a newborn. While these accounts can earn interest, there are other types of savings you might use to fund different goals for your child. Here are some of the other options you might consider when saving money for a baby.
529 College Savings Accounts
Many parents — even brand-new ones! — wonder how to start saving for college. A 529 college savings account is a type of tax-advantaged plan that’s designed to help you save for education expenses. These accounts can be opened by the parent but anyone can make contributions, including grandparents, aunts and uncles, or family friends. All 50 states offer at least one 529 plan.
There are no annual limits on 529 plan contributions and you can open any state’s plan, regardless of which state you live in. Contributions are subject to annual gift tax exclusion limits, which are $16,000 for single filers and $32,000 for married couples filing jointly in 2022.
With a 529 plan, you’re investing money rather than saving it. You can invest the money you contribute in a variety of mutual funds, including index funds and target-date funds. This money grows tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition and fees, books and room and board.
Coverdell Education Savings Accounts
There are other ways to save for a child’s college tuition. A Coverdell Education Savings Account (ESA) is a type of custodial account that can be set up to save for education expenses. This account grows tax-deferred just like a 529 plan and qualified withdrawals are tax-free. But there are some key differences:
• Annual contributions are capped at $2,000 and are not tax-deductible
• Contributions must end once the child reaches age 18 (an exception is made for special-needs beneficiaries)
• All funds must be distributed by the time the child reaches age 30
If you leave money in a Coverdell ESA past the child’s 30th birthday, the IRS can impose a tax penalty. Any withdrawals of ESA funds that aren’t used for qualified education expenses are subject to income tax.
Custodial accounts are savings accounts that allow minors to hold assets other than savings, such as stocks or other securities. You can set up a custodial account with a brokerage on behalf of your child. As the custodian, you maintain ownership of the account and its assets until your child reaches the age of majority, typically either 18 or 21. At that point, all the money in the account becomes theirs.
Opening a custodial account could make sense if you want to make irrevocable financial gifts to your kids. This could be one of the best strategies for building an investment plan for your child. The biggest drawback, however, is that once they turn 18 (or 21) you no longer have control over the account or how the money inside of it is used. For some parents, relinquishing that control can be hard, but remember: There’s lots of financial literacy that can be gained between your child’s birth and officially entering adulthood.
Let SoFi Show You How to Save
Helping your child be a smart, lifelong saver is a terrific goal. Saving money helps build wealth and finance your dreams. How are you doing on that front? One great place to start saving is with a high yield bank account like SoFi Checking and Savings. Members with direct deposit can earn 2.00% APY on the first $50,000 of their balances. Plus, you won’t be hit with overdraft fees, minimum balance fees — or any monthly fees. So your money can really get growing.
Can I start a savings account for my baby?
Yes, opening a savings account for a baby is something you can do even if they’re still a newborn. Traditional banks, credit unions, and online banks can offer savings account options for babies and kids. You can also explore savings account alternatives, such as 529 college savings plans or custodial accounts.
What type of savings account should I open for my newborn?
The type of savings account you open for a baby can depend on your financial goals. If you just want to get them started saving early, a basic savings account might work best. On the other hand, you might consider creating an investment plan for your child that includes a 529 savings account if you’re interested in putting aside money for future college expenses.
Photo credit: iStock/michellegibson
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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