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Teaching your child financial responsibility starts at a young age. One of the best ways to teach financial responsibility is to open a bank account. It’s never too early to start saving!
Teaching your child financial responsibility starts at a
young age. One of the best ways to teach financial responsibility is to open a
bank account. It’s never too early to start saving!
Figuring out what kind of account is
appropriate for your child, however, can be overwhelming. You want an account
that will keep the money safe, allowing you to help manage those vital funds.
You don’t want your child to be trapped by fees that could potentially decrease
the amount of their account, nor do you want them to access the money too
early. Free checks should not be a major deciding factor, since personal checks can be purchased
inexpensively online. On the other hand, you do want your child to be able
to use the money they’ve saved for college, that first car, and other major
expenses. How do you decide what type of account is right for your child?
Know Your Accounts
Trust For (ITF) or Custodial Accounts
allow you to maintain control of the money in the account as usual throughout
your lifetime, but transfer the assets easily to your child as soon as they reach
the legal age. (The legal age is currently 18 years old.)
Accounts place both your name and your child’s
on the account. This means that both of you can make decisions about how to
withdraw, transfer, and use funds.
Plans are savings plans specifically designed
to set aside money for your child to use on college. This is a great way to
create a college savings account dedicated specifically to education costs.
By Accounts allow you and your child to put money
into the account for later use, then withdraw the money at a normal rate at the
age of 18. This can provide funds for college, a first home of their own after
high school, or other needs as your child ages.
Accounts give your child sole ownership of the
account. As a minor, however, you will need to be on the account to help them make
Trust or POD Accounts pass the money in
a particular account to your child in the event of your death.
Transfers and the Gifts to Minors Act allow
minors to own property and enter into contracts with a custodian or trustee to
manage the account.
For federal income tax purposes, the
amount of tax payable for a child’s account depends on three factors: the
incidence of ownership, the type of income, and the amount of income. If the
child owns the account or trust, it is their responsibility to report any
associated income, and they will be responsible for taxes on that account. On
the other hand, if the account is owned by someone else and the child will
simply benefit from it later, it’s the responsibility of the account owner to
deal with the taxes. Earned
versus unearned income have different tax laws, but reporting is relatively
straightforward. Taxation for children’s income begins at $950, and the next
$950 is taxed at the child’s rate. After that, income is taxed at the parent’s
a bank account for your child, whether an account that they’re allowed to
access or one that will benefit them upon turning eighteen, graduation, or your
death, is a great way to start them down the road to financial success. From
their first birthday present income to odd jobs, babysitting, and that ultimate
first “real” job, encouraging your child to set aside a portion of their income
will set them up for great financial habits for the rest of their lives. Not
only that, they’ll have a source of savings that will help cover critical
expenses at later points in life. Carefully evaluating the type of account that
is best for your child, will allow you to make the right decision when it comes
to setting up the account and choosing how to manage those funds.
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