If you’re the proud grandparent of a new baby in the family, the thought of preparing for their financial future may have occurred. In between moments of joy, your mind may have been several steps down the road, thinking about college expenses, buying a new car and more. Fortunately, setting up a savings account is a straightforward process that can set your grandchild up for financial success. So whether you want an account strictly for education costs or have something more open-ended in mind, here’s how to set up savings accounts for grandchildren.
A financial advisor can help you create a financial plan to help pay for future family expenses.
Why You Should Open a Savings Account for a Grandchild
Your grandchild is growing up in a world where costs are more inflated than ever, particularly for education. For example, the cost of an undergraduate degree rose 169% from 1980 to 2020. That said, a savings account will be helpful for your grandchild, whether they choose higher education or another career path. A savings account can function as a tuition fund, help your grandchild start a business, or allow them to purchase tools for their chosen trade.
Savings Accounts Grandparents Can Open for a Child
Grandparents have several options for opening a savings account for a child. Whether you’re focused on affording education or simply aiming for the best return on investment, consider these four account types:
529 college savings plans. A 529 plan is similar to a retirement account – but instead of distributing funds to those exiting the workforce, it helps pay for your grandchild’s college tuition, books and fees. The money is tax-exempt if it covers college-related expenses. Plus, your state may provide further tax advantages for your deposits. However, if your grandchild uses the money for anything other than eligible education expenses, they will most likely incur significant taxes and fees.
UGMA & UTMA accounts. Accounts of the UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfer to Minors Act) varieties let you stockpile assets on your grandchild’s behalf. Also called custodial accounts, they can hold cash, stocks and bonds that will transfer to your grandchild’s possession at a specified age (usually 18 or 21).
Custodial accounts are subject to capital gains taxes that the grandparent may choose to pay on behalf of the child. Additionally, if the account experiences high enough returns, your grandchild’s parent might have to file a tax return for the income. That said, the government taxes custodial account gains using the child’s tax threshold, which is usually lower than the parents’ or grandparents’ tax rate.
UGMA and UTMA accounts can pay for any expense. This open-endedness is a double-edged sword. On one hand, the grandparent cannot designate how their grandchild can use funds in the custodial account. However, the grandchild has flexibility with the money and can defray the costs of education, a business venture, property and more through the custodial account.
Certificates of deposit. Certificates of deposit (CDs) are like savings accounts on steroids. They provide better interest rates than most savings accounts but lock your money into the account for a fixed timespan. For example, you might obtain a CD for 3, 5, or 10 years. During that period, the funds accrue interest but are inaccessible. If you must withdraw the money from the CD before it matures, you will forfeit some or all of the gains. Your grandchild can use CD funds for any purchases or expenses.
Conventional savings account. A typical savings account at a bank is a straightforward way to create a fund for a grandchild. While savings accounts provide the smallest returns of your options, you can withdraw the money at any time and shift it into something else down the road. However, the interest accrual may be so minuscule that it won’t keep up with inflation.
How to Set Up a Savings Account for Grandchildren
Once you decide what kind of account you’d like to create for your grandchild, follow these seven steps to put your plan into action:
Ask your bank. Your bank or credit union can provide information about their accounts for children. For example, you will want to learn about account minimums, interest rates and the age at which your grandchild will receive ownership of the account. In addition, most banks give extra bonuses for these accounts because they are eager to earn the business of the next wave of young people as they begin to work and make money.
Gather the requisite information. Opening a financial account requires personal information. To open one on your grandchild’s behalf, you will need their full name, birthday, complete address, phone number and Social Security number. Plus, you will submit the same details regarding yourself or another adult, like a parent, who will oversee the account.
Make a plan with your grandchild. Not only can a savings account benefit your grandchild financially, it’s also an educational opportunity. Visit your grandchild and explain the plan to open a savings account. If they are old enough to contribute, help them assess how much money they currently have and how much they can afford to deposit to the account each month. Involving your grandchild from the start can provide a teaching moment about setting financial goals, making a plan and being responsible with money.
Go to the bank. Now that you have the necessary information and your grandchild’s buy-in, it’s time to open the account. Bring your child to the bank with you. On the way, you can rehearse what your grandchild will tell the banker why you’re there. After they speak their piece to the banker, have the banker outline the account details (such as the interest rate or CD maturation) to your grandchild. Then, you and your grandchild will sign the documents for the account. If possible, ask the bank to send statements to you and your grandchild so you can both see how the account is doing.
Open the account. With the documents signed, it’s time for the initial deposit. Direct your grandchild in filling out the deposit slip and handing over the designated amount of money. Then, congratulate your grandchild – they just opened their savings account!
Get organized. If your grandchild will receive paper statements, get a binder or file folder to keep the deposit receipts and statements sorted. On the other hand, your grandchild might be old enough for email, in which case you can help them create a filing system for electronic statements. In any case, the goal is to organize bank statements to make filing taxes a smooth process.
Continue making deposits. Whether you take monthly trips to the bank or make deposits with online banking, make it an interactive experience for your grandchild. It’s a good idea to frequently show them how their account is growing and explain the power of saving money.
Opening a savings account can give your grandchild a leg-up financially for college expenses and more. Plus, it grants the benefit of teaching your grandchild the value of saving money, instilling an essential financial habit. There are multiple types of savings accounts you can open. From the traditional bank account to the 529 plan, options are available to build wealth and brighten your grandchild’s future.
Tips for Opening a Savings Account for Grandchildren
- A financial advisor can help you create a financial plan for your grandchildren. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Opening a savings account for your grandchild is a perfect opportunity to begin their financial education. Their 529 plan or long-term CD is ideal for learning some financial basics. For example, how does interest build up over time? This savings calculator can help your grandchild see how their account will grow for years to come.
- You’ll also want to be aware of the fees and requirements of a savings account. Some banks do charge a monthly fee to have a savings account. You may be able to waive this fee by meeting a certain account balance. However, if these minimums and fees are not feasible for you to meet, you can easily find another savings account elsewhere.
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