As your mom probably told you, it’s never too early to start saving. Whether you’re a young parent trying to give your kids the best start in life, or a young adult setting aside your allowance for a rainy day, consider the options for establishing a bank account before deciding what works best for your situation. A custodial account and joint account each provide various tools for parents to help facilitate the financial independence of their children over time.
Opening A Custodial Account
Minors cannot hold savings accounts in their own names. A minor can, however, open a custodial account, managed by an adult custodian, until the minor comes of age. Crucially, the money in a custodial account belongs to the minor. Parents who add funds cannot take them back. The custodian may withdraw funds from the account, but the proceeds must be used for the minor’s exclusive benefit. For example, the custodian may pay the minor’s school fees, but cannot buy himself a car.
Opening Joint Account
Some states allow a minor to open a bank account jointly with a parent or legal guardian. These accounts differ from custodial accounts in that both owners have equal access to the account and everything in it. Moreover, both owners have the right to withdraw 100 percent of the money in the account without the co-owner’s knowledge or consent. From a minor’s perspective, joint accounts are dangerous. Not only can their co-owner withdraw all the money, the account is also susceptible to claims, debt collection, judgments and liens attaching to the adult.
Variations on a Theme
States have their own laws about minors’ bank accounts, and banks operate their own policies within the mandate of such laws. Banks may restrict children below a certain age, typically around 13, from withdrawing money from a joint account without a parent’s signature. In some states, the minor may be able to operate an individual bank account from around age 16. Older teens with a solo or joint account may have access to debit cards and overdraft facilities. These accounts may offer benefits, such as specialist student services or preferential interest rates.
The Age of Majority
Typically, the minor gains full legal access to his custodial account once he reaches the age of majority – usually between ages 18 and 21. After that, they are free to do with the money what they will. A joint account does not become the property of the minor once they reaches adulthood; it remains jointly held until the account owners change the account or close it down.
Understanding the Kiddie Tax
The income from the minor’s account is taxed to the minor. The child’s guardian may have to file federal and state tax returns for the child if the amount of interest earned on the account exceeds Internal Revenue Service limits. Under the new 2018 IRS "kiddie tax" rules, any investment income above $2,100 is taxed at the parent’s tax rate. The top rate is 39.6 percent for interest dividends.
- Bankrate: Risks of Joint Bank Accounts
- Deposit Accounts: Financial Accounts for Minors
- KIplinger: Big Change Afoot for the "Kiddie Tax" Under the New Tax Law
- Office of the Comptroller of the Currency. "Guidance to Encourage Financial Institutions’ Youth Savings Programs and Address Related Frequently Asked Questions," Page 2. Accessed Feb. 8, 2020.
- Conference of State Bank Supervisors. "Statutory Requirements for Opening Bank Accounts for Minors by State." Accessed Feb. 8, 2020.
- Global Financial Literacy Excellence Center. "Minor Bank Account Laws, Account Ownership, and Downstream Outcomes," Page 6. Accessed Feb. 8, 2020.
- Capital One. "Money: Teen Checking Account With Debit Card." Accessed Feb. 8, 2020.
- Social Security Administration. "SI 01120.205 Uniform Transfers to Minors Act." Accessed Feb. 8, 2020.
- U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed Feb. 8, 2020.
- Internal Revenue Service. "Topic No. 310 Coverdell Education Savings Accounts." Accessed Feb. 8, 2020.
- Federal Trade Commission. "Prepaid Cards." Accessed Feb. 8, 2020.
- Bank of America. "Accounts for Students FAQs." Accessed Feb. 8, 2020.
- Internal Revenue Service. "Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)." Accessed Feb. 8, 2020.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.