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 before deciding what works best for your situation.
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.
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 his 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, he’s free to do with the money what he will. A joint account does not become the property of the minor once he reaches adulthood; it remains jointly held until the account owners change the account or close it down.
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.