The Basics of Baby Savings Accounts

Here’s what you need to know about setting up a bank account for your newborn.

CONGRATULATIONS! The stork has just delivered a bouncing baby boy or adorable girl. But alas, the big-beaked bird forgot advice on how to save money for your new addition. How about a baby bank account?

“It’s a great idea,” says Judith Corprew, executive vice president, chief compliance and risk officer at Patriot Bank N.A. “Compound interest does best with a very long runway. If you start, even by socking away $5 or $10 a week, the power of growth will do wonders, but it is also an opportunity to indoctrinate children into understanding how to save for their future.”

Here’s what to know to get started.

As with any type of savings account, you’ll need some information and paperwork to get started. Your setup checklist includes:

  • Your name and baby’s name on account
  • Your ID, such as your driver’s license or some other official proof of identity
  • Baby’s birth certificate
  • Enough money to meet the account minimum. Whenever possible, select an account option that has no minimum balance requirements and charges no fees.
  • A quick check on other minimums. These will apply to monthly balance and deposits. Each will vary depending on the bank or credit union you select.

Once you have that all in order, go to a bank branch. Opening an account for a baby and in both of your names isn’t like opening a personal account online or by phone, so the in-person assistance will be helpful. (Don’t worry, baby won’t have to sign for anything.)
If you just can’t wait and want to open an account before your baby is here, you can do that – but it will be under your name and your Social Security number, as your baby doesn’t have an assigned number – or perhaps even a name – yet. Once baby is here, a banker can help you add all of the necessary information to the baby savings account.

Advantages

Convenience. Making deposits to a baby savings account is as easy as with any checking or savings account.

Ideal for “set it, and forget it” automatic deposits. An automatic deposit of just $10 weekly, contributed over 18 years with a starting balance of $100, will turn into about $11,500 by the time your kid turns 18, assuming a typical 2% interest rate.

“Even if the amount is small, eventually you’ll see these deposits add up and grow over time,” says Tim Sheehan, the CEO and co-founder of Greenlight, a company that offers debit cards for kids. “When your child is of age, you can show them the meaningful growth and begin instilling good saving habits.”

Later lessons on saving. As your child grows, making deposits – especially at a local bank branch – will be a valuable experience in managing personal finance and will teach them the habit of saving regularly. Walking up to a bank teller window is a very adult thing to do.

Tax advantages. You’re the custodian of the account, but the account belongs to the minor. And since babies usually do not make enough money to pay taxes, their interest income is not taxed.

Disadvantages

Weak returns. Interest returns on saving accounts can be as low as 0.01% annual percentage yield. At that rate, money isn’t going to compound effectively over time.

Account fees. Some banks will charge a monthly maintenance fee, often $5 or less, if your account doesn’t meet a minimum balance. And that can eat up your money – fast. As of April 2019, a Chase savings account offered the aforementioned 0.01% APY and charged a $5 monthly fee if you carry less than the minimum balance. Based on these terms, a $100 account you start at birth and then leave alone will be worth $40 by the time baby hits age 1. Not exactly a happy birthday, is it?

Rules on withdrawals. Banks are highly regulated by the Federal Reserve, and Regulation D, or Reg D for short, limits you to six transactions per month on certain transfers and withdrawals from your savings account, though this does not apply to ATM or in-branch transactions. As for a personal rule, consider this: A baby savings account, especially since it’s meant to build a baby nest egg, is best left untouched where withdrawals are concerned.

529 plan. This is a special savings account for education-related expenses such as tuition, meal plans and computers. It provides for investment growth and tax advantages that are similar to retirement accounts.

Other types of investment accounts. An index fund, for example, is an investment account tied to a certain index, such as the S&P 500, which is based on the stock values of 500 large companies. So the fate of baby’s money is connected to how well the index does – and in the case of the S&P, the growth rate was 7.41% between April 2018 and April 2019.

The Growth on Investment Accounts Versus Savings Accounts

Placing $100 in a savings account and leaving it alone for 18 years at 2% APY would be worth $143. How does that same 18-year scenario fare against investment options?

  • Between April 2001 and April 2019, the S&P 500 has gone up 157.44%, a yearly average of 8.75% – making a $100 investment worth $257.44 in 18 years.
  • In a 529 college savings plan, $100 compounded at 8% annually would be worth $400. What’s more, the growth is tax-free; however, there are strict limits that require the money be spent on education-related expenses. The baby who grows up to want a sports car may not exactly be thrilled with that, though lower tuition costs are always nice.

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