Bank Accounts for People Under 18
A bank account is a necessity these days. It’s never too early to start saving money, and banks keep your money safe. Plus, paying with a debit card makes life easy—you can’t really shop online without one (although paying with a credit card would be safer when it comes to consumer protection).
For people under the age of 18, opening a bank account is hard. The problem is that you need to sign a contract to open an account, and contracts signed by minors are complicated. As a result, banks aren’t going to open accounts for anybody under 18 unless there’s also an adult on the account.
Experience and independence. Minors don’t have to exist completely outside of the banking system. There are several ways to open an account for somebody under 18, and children can even actively use bank accounts in some cases. Getting comfortable with money is an important skill that can pay off through life, and it provides independence to responsible children.
Saving for the future. If parents want to open and manage accounts to provide for future expenses, it’s easy to do so. You can even open accounts for a newborn.
The details on these accounts vary from state to state and from bank to bank (so ask your bank's customer service department for specifics), but the most common solutions are explained below.
If the goal is for the minor to use the account (making deposits, withdrawals, and purchases with a debit card, for example), a joint account will do the trick. Simply open an account with at least one adult as an account holder. That account can be a plain-vanilla joint account or an account designed for the under-18 crowd.
Most accounts marketed as “bank accounts for kids” come in the form of joint accounts, although they go by different names:
- Teen Checking Accounts
- Youth Savings Accounts
- Looney Tunes Accounts
- Savings Club
- Student Checking
In some cases, the adult needs to be a family member or legal guardian, but some banks allow anybody to be the joint owner (Capital One 360, for example).
Joint account risks. With a standard joint account, each account holder has 100% access to the funds, so either the adult or the child can drain the account and rack up overdraft fees (unless the bank restricts what the child can do). Keep that in mind before you set your child loose with a large available balance. If you are the minor, it's important to share an account only with an adult you can truly trust—you don't want your hard-earned money to disappear.
Staying informed (or in control). For better or worse, these accounts may have features that keep adults informed about activity in the account. Parents can set up text or email alerts, and they may even be able to set spending limits on debit cards if overspending is a concern.
Age 18? Be sure to ask your bank what happens when the minor reaches age 18. If there were restrictions on what the minor could do (if they were unable to make withdrawals, for example), things might change, and you’ll want to know that ahead of time. Likewise, any fee waivers are likely to disappear (but you might get them extended if the adult becomes a student). If the minor needs their own account, you can try to remove the “old adult” from the account or open a new account when the minor turns 18.
Custodial accounts are another option. Also known as UGMA or UTMA accounts, these accounts are useful when the minor will not be involved with money management. They’re not for children to use, but they are used for the benefit of children.
For the child’s benefit. The funds in a custodial account legally belong to the child, and any deposit made to the account is an irrevocable gift. An adult must make decisions (whether or not to buy a CD) and handle the logistics (make deposits and withdrawals), but the money can only be spent for the child’s benefit.
In other words, the adult cannot buy luxury items for personal use because that would be stealing from the child. Paying for the minor’s education or buying them a car, on the other hand, are probably acceptable expenses.
Age 18? Upon becoming an adult, any money in a custodial account is the “minor’s.” Once they're an adult, they can do anything they want with it—from investing in education to cashing out and blowing it over the weekend.
Where to Open an Account
Almost any bank or credit union will offer the accounts described above, so you'll just need to shop for the features that are most important to you. Look for low (or no) fees, a competitive interest rate, and an institution that's easy to work with. If you can't find anything locally, online banks are a good option.
In addition to bank accounts, there are several accounts available specifically for education costs. These accounts may have tax benefits (check with your tax advisor before making any decisions), so they can ease the burden of paying for school.
529 Plans. College savings plans allow you to contribute to an account and, assuming you follow all of the relevant tax laws, spend the money tax-free on higher education expenses. “Higher education” can include trade schools, overseas institutions, room and board, and other costs for college or graduate school. You can make significant contributions to these accounts, so they are a powerful way to save for the future.
Coverdell Education Savings Accounts (ESA): For other education expenses, such as elementary school tuition, an ESA might help you build up funds you need. These accounts can also be used for college. However, not everybody is eligible to contribute to an ESA, and the maximum annual contribution is fairly low, so you’ll need to start early.
If the primary goal is simply for a teen to pay with plastic, prepaid cards are another option. However, prepaid cards are notoriously expensive, and they don’t offer much that a checking account can’t offer. Bank accounts for teens and children usually come with lower fees (or fee waivers that are easier to qualify for), so the odds of getting a better deal with a prepaid card are slim.
Important Tax and Legal Issues
Whether you use a joint account or a custodial account, it’s important to consider the tax and legal implications.
Beyond the tax and legal issues, using these accounts can also affect a child’s ability to qualify for student aid. If you’re concerned about education expenses, speak with an expert on education funding.
Talk with a local tax advisor to find out what to expect with each type of account; you might have to deal with gift taxes, estate issues, “Kiddie” Taxes, and other complications. In addition, a local attorney can help you understand any legal pitfalls. Especially when large sums of money are involved, your time is well spent when you talk with a professional advisor. You might even find that a trust (and related accounts) will work better.
Office of the Comptroller of the Currency. "Guidance to Encourage Financial Institutions’ Youth Savings Programs and Address Related Frequently Asked Questions," Page 2. Accessed Jan. 7, 2020.
Global Financial Literacy Excellence Center. "Minor Bank Account Laws, Account Ownership, and Downstream Outcomes," Page 6. Accessed Jan. 7, 2020.
USAA Federal Savings Bank. "Banking for Kids: Teach Your Teen Good Money Habits." Accessed Jan. 7, 2020.
Social Security Administration. "SI 01120.205 Uniform Transfers to Minors Act." Accessed Jan. 7, 2020.
U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed Jan. 7, 2020.
Internal Revenue Service. "Topic No. 310 Coverdell Education Savings Accounts." Accessed Jan. 7, 2020.
Consumer.gov. "Prepaid Cards." Accessed Jan. 7, 2020.
Bank of America. "Accounts for Students FAQs." Accessed Jan. 7, 2020.
Internal Revenue Service. "Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)." Accessed Jan. 7, 2020.