Can I Open a CD Account for My Child?

Custodial accounts allow you to make investments on your child’s behalf

A parent and child work on a laptop.
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Opening a certificate of deposit (CD) account for your child can help them get a head start on saving. To open a CD account for a child, you'll need a custodial account if you want them to have control over the money once they become an adult.

Learn more about the advantages of CDs, how to compare CD accounts, and how to open one on behalf of a child.

Key Takeaways

  • Opening a CD account for your child can be a good way to introduce them to the concept of saving.
  • Custodial accounts allow you to maintain ownership of a CD account for a minor, then transfer ownership to them once they become an adult.
  • When choosing a CD account for a child, consider minimum deposit requirements, interest rates, and fees.
  • Money in CD accounts or other savings accounts for minors can impact financial-aid eligibility in the future.

Can You Buy a CD for Your Child?

A certificate of deposit account (CD) is a type of savings account that can be used to save for short- or long-term goals. This account, which is a type of term deposit or time deposit, can be a low-risk way to save money and earn interest while keeping your funds at an FDIC-insured bank.

You can open a CD for yourself or on behalf of your child using a custodial account. A custodial account allows one person to deposit and maintain funds on behalf of someone else. For example, the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) allow for the creation of custodial accounts on behalf of minors.

The adult who opens the account, typically a parent or legal guardian, has control over the account until the child reaches adulthood. At that point, the child becomes the legal owner of all the money in the account.

Once you open a custodial account for a child, you can't change the beneficiary. This means the child you opened the account for is entitled to the money and you can't transfer the account to another child. So, if you have three children and you want to open CDs for each of them, you'll need three different custodial accounts.

It's also important to understand how opening custodial accounts might affect your child's financial-aid eligibility later in their life. Assets held in UGMA and UTMA accounts are considered the student's assets and they are weighed more heavily than parents’ or guardians’ assets on the Free Application for Federal Student Aid (FAFSA).

So, having money in custodial accounts instead of in a 529 plan or a Coverdell Education Savings Account (ESA) could affect how much college aid the child receives.

Financial gifts made to a UGMA or UTMA account are irrevocable, meaning once you put the money in, you can't take it back out again.

How To Open a Custodial Account for Your Child’s CDs

Opening a custodial account is similar to opening a bank account. The first step is finding a bank, brokerage, or other financial institution that offers custodial accounts. You may want to start with your current bank or brokerage, then expand your search from there.

Once you find the right bank or brokerage, you can take the steps below to open a custodial account and buy CDs for your child.

Choose an Investment Account

If you're opening a custodial account online, the first question you'll be asked is what type of account you'd like to open. Depending on the bank or brokerage, you may be asked what type of account you want to open, such as a custodial 529 college savings account, a custodial UGMA/UTMA account, or a Roth IRA for kids.

If you'd like your child to have more flexibility in how they use the money later, however, you may want to choose a UGMA or UTMA account.

You could choose a 529 college savings plan if you specifically want to save money for education expenses. You typically can’t buy a CD in a 529 plan, but you can roll some CDs into them. A 529 plan offers tax-deferred growth and tax-free withdrawals when the money is used for qualified education expenses.

Instead of investing in CDs, however, you'd invest in a selection of mutual funds and/or exchange-traded funds (ETFs) with a 529 plan. You could then eventually roll funds from a custodial account that's been used to purchase CDs, such as a UGMA/UTMA account into a custodial 529 college savings account.

A Roth IRA for kids is an account managed by any adult on behalf of a child who is earning income. FDIC-insured CDs are among the many investment choices a Roth IRA account may accept. Contributions can grow tax-free but they can't exceed the amount the child has earned. There are annual contribution limits as well. For 2022, the annual IRA contribution limit is $6,000.

Enter Your Personal Information

Once you've made your account selection, you'll need to enter your personal information. This usually includes your:

  • Name
  • Date of birth
  • Social Security number
  • Address
  • Phone number
  • Email address

If you don't already have an account with the brokerage, you'll also need to create a user name and secure password. Depending on the bank or brokerage, you may be asked for your employment status and income. A brokerage may also ask whether you have any affiliations with a broker-dealer or securities firm, or whether you are a 10% shareholder in a publicly traded company.

Enter Your Child's Personal Information

The bank or brokerage will also need some information about your child to open a custodial account. This usually includes their:

  • Name
  • Date of birth
  • Social Security number
  • Legal address and mailing address

You'll also need to indicate in which state the custodial account will be opened.

Link Your Bank Account

The next step is linking an external bank account. You'll need your bank account number and routing number. The bank or brokerage that's opening the custodial account for you may require you to verify your linked account using one or two small test deposits.

Buy CDs for Your Child

The final step is purchasing CDs to hold in the custodial account. If you're opening your custodial account with a brokerage, you should be able to log in online to view CD options. Your bank may also allow you to view CDs you can purchase through online or mobile banking.

You'll need to decide how many CDs you want to purchase and how much money to put in each CD. Here's where you'll want to compare CD terms and interest rates to decide which ones will work best for your child.

Using an online CD calculator can help you estimate how much interest your child's CDs will earn.

What Kind of CDs Work Best for Children?

Choosing CDs for your child's custodial account can depend on several things, starting with your goals. For example, are you interested in holding onto CDs in a custodial account for the short or long term? Longer-term CDs may offer a higher APY compared to shorter-term CDs. But if rates rise over the CD term, you may miss out on those increases.

A CD laddering strategy might be appropriate if you want to create some flexibility and potentially maximize interest earnings. With a CD ladder, you buy multiple CDs with varying maturity terms and interest rates to give you more liquidity. As each CD matures, you can decide whether to roll it over to a new CD or invest the money elsewhere.

Depending on your child’s age, you may want to involve them in the decision-making process. This can be an opportunity to discuss basic concepts such as the differences between saving and investing. Older kids may also be able to grasp concepts such as compounding interest or brokered CDs.

A brokered CD is different from a bank CD in that it can be traded on the secondary market. If you're able to purchase those inside a custodial account, you could use that as a starting point for teaching kids about more complex investing concepts.

The Bottom Line

Opening a CD account for kids is one way to teach them about savings and help build funds for a long-term goal. You'll need to open a custodial account for them, but buying CDs for kids doesn't have to be complicated. The key is to choose a CD that aligns with your goals for your child.

Frequently Asked Questions (FAQs)

Is a CD or a high-yield savings account better for kids?

Whether a CD or high-yield savings account is better for kids can depend on interest rates and what kind of access you want to have. While CDs may offer higher interest rates, the money in a custodial account isn't accessible without an early withdrawal fee until the child is an adult. High-yield savings accounts, by comparison, can allow for withdrawals at any time.

How much money can you put in a CD?

The maximum amount of money you can put in a CD is determined by the bank or brokerage that is offering the CD account. When opening bank CDs, keep in mind that FDIC coverage is limited to $250,000. Some banks may have minimum purchase levels for CDs.

Article Sources

  1. Consumer Financial Protection Bureau. “What Is a Certificate of Deposit (CD)?

  2. Federal Deposit Insurance Corp. “FDIC: Financial Institution Employee's Guide to Deposit Insurance - Single Accounts.”

  3. Financial Industry Regulatory Authority. “Saving For College: UGMA and UTMA Custodial Accounts.”

  4. IRS. "IRS Announces Contribution Changes."

  5. U.S. Securities and Exchange Commission. “What Are Certificates of Deposit?"