Kids have money coming in? Plenty of ways to sock it away
If your child has gift money from birthdays or earnings from chores or a part-time job, you may be looking for somewhere to park the cash.
Opening a bank or retirement account provides a secure way for youngsters and teens to save money, and you can use it as an opportunity to share financial lessons with them as well. Consider these options.
Bank account: If your child is going to focus primarily on saving, a savings account without a linked checking account makes sense. However, if you’re introducing an older child to responsible spending, a checking account can be a valuable tool, too.
Whichever type of account you choose, you and your child will likely need to open it jointly. You can monitor their transactions and set limits by asking the bank to restrict how much can be charged daily to an accompanying debit card.
Look for an account with a low (or no) minimum balance requirement and no monthly fee, which is suitable for children who tend to keep smaller balances.
Some accounts are designed for young savers and spenders, offering educational resources, online tools that both parents and children can use, and minimal fees. Among them: Capital One’s online Kids Savings Account and MONEY Teen Checking account (www.capitalone. com), as well as the Alliant Credit Union’s Kids Savings Account and Teen Checking account (www.alliantcreditunion.org).
Prepaid card: This isn’t linked to a bank account; instead, you load money directly onto the card. Prepaid cards provide a hard limit on spending — you typically can’t overdraw as you sometimes can with a bank account — and that may be an attractive feature for kids who are learning the ropes of spending money.
Some prepaid cards are tailored for families with children. For instance, the Greenlight mobile app (greenlight.com) offers a prepaid debit card through three plans for families. Parents can set controls, view a transaction history and, if needed, lock the card if it’s lost or stolen.
The downside? Many prepaid cards come with several fees.
Roth IRA: If children have earned income from a job, they can contribute to a custodial Roth IRA that can introduce them to investing for retirement.
Custodial Roth IRAs are offered by major brokers, such as Fidelity, Charles Schwab and Vanguard. Contributions are the lesser of the child’s annual earned income or the yearly IRA contribution limit, which is $7,000 in 2024 for those younger than 50. A parent can also contribute to the Roth on behalf of the child, as long as the amount falls within the limits.
Roth contributions are made with posttax income. But the investments grow tax-free, and withdrawals during retirement are tax-free, too.
You can withdraw contributions to a Roth at any time without triggering taxes or a penalty. Earnings withdrawn before age 59½ are typically subject to tax and a penalty. However, younger investors who have owned a Roth for at least five years can withdraw up to $10,000 to purchase their first home without paying taxes or a penalty.