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Custodial Account Vs. Kid’s Savings Account. What to Know

  • Custodial accounts are investment accounts an adult manages until a child is usually 18 or 21.
  • A kid’s bank account is a type of joint bank account both a parent and child can use.
  • Custodial accounts are ideal for long-term savings while kid’s bank accounts help with money habits.
  • Read more stories from Personal Finance Insider.

When you’re beginning to look at savings accounts for children, some of the terms used by financial institutions seem interchangeable. However, while a custodial account sounds similar to a kid’s savings account, they’re actually entirely different. 

Understanding key differences between these savings vehicles may ensure you’re ultimately choosing the best accounts for your goals. We’ll provide an overview of these accounts and advice on which makes the most sense at your child’s age.

Custodial account vs. kid’s savings account: At a glance

Custodial accounts and kid’s savings accounts are two different types of accounts you’ll find available at most financial institutions. While both are focused on saving money for children, the purpose and functions behind the accounts are entirely different.

  • A custodial bank account includes different investment options that a parent will primarily manage.
  • A kid’s savings account is usually a joint bank account where both parents and children manage money.

What is a custodial account?

Custodial accounts are a kind of investment account an adult can set up for a minor. Any funds contributed to the minor belong to the child and are considered irrevocable.

Two types of custodial accounts for children are UGMAs (Uniform Gifts to Minors Act) and UTMAs (Uniform Transfer to Minors Act).

UGMAs let you buy stocks and bonds. You may also invest in mutual funds.

UTMAs allow you to invest and transfer any property. For example, you could transfer real estate or artwork to your child. 

Custodial accounts will be better long-term savings options than traditional kid’s savings accounts. These accounts involve more risk since you’re investing instead of saving, but over time, you’ll have the ability to earn more on the initial amount.

Pros and cons of custodial accounts

When should you open a custodial account? 

Vera Kelsey-Watts, CFP, and principal financial advisor of Saltbox Financial, says custodial accounts could be a good option for very young children.

Many new parents might initially consider opening up a kid’s savings account for their baby, however, Kelsey-Watts says this isn’t a wise decision. 

“We are in a time where bank accounts are not an accumulation mechanism,” says Kelsey-Watts. “I’m a big fan of custodial accounts for very young children. When we think about things from an investment perspective, they’ve got very long investment horizons. Putting aside $10 into an investment in 2022 is the most efficient use of that $10.”

What is a kid’s savings account?

A kid’s savings account is a joint bank account both a child and parents can use. If you’re thinking about a standard bank account, then that’s a kid’s savings account.

Kid’s savings accounts vary across financial institutions. Some states and financial institutions have age limits or restrictions. Under the opening requirements for an account, most financial institutions will list any age requirements. Some financial institutions also include special perks like debit cards and savings tools to encourage kids to save. 

Pros and cons of kid’s savings accounts

When should you open a kid’s savings account?

Kelsey-Watts told Insider once you are ready to start having conversations about money with your child, it may be time for a kid’s savings account. 

“This is where a child’s savings account or even child’s checking account is the best mechanism for developing good financial literacy and for developing good money habits,” Kelsey-Watts explains.

Kelsey-Watts also suggests looking at bank accounts that offer a sense of progression.

“Then there’s natural breakpoints. When that child turns X age, they become eligible for a debit card. The parent  would be notified, and the bank would say, ‘Now you can have a debit card.’ So, the kid goes in. It’s not just for the adult to do, and we have the experience of visiting a bank and building a relationship,” says Kelsey-Watts.