Key Takeaways
- You can open a CD for a child using a custodial account, where an adult manages the money until the child becomes an adult.
- CDs are a low-risk way to help kids start saving and learn about money.
- Once the child reaches adulthood, the money in the account legally belongs to them.
- If you want more growth or tax benefits, other options like 529 plans or Roth IRAs might be better.
Can You Open a Certificate of Deposit for a Child?
Yes, you can open a CD for a child. These low-risk vehicles are an excellent way to save over short to intermediate periods of time. They exhibit no volatility and offer guaranteed rates of interest, assuming deposited funds are left on deposit for a specified term —usually between one month and five years.
If your child has some money to invest (gifted or earned), you can open a custodial account for them and add a CD to it. When your child reaches adulthood, they will become the legal owner of the asset.
Keep in mind that a custodial account is irrevocable. Once you make a deposit, you cannot take it back — and the child can access the money once they reach the age of majority in your state, typically 18 or 21.
Laws on Custodial Accounts
The laws that govern custodial accounts are the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).
The UGMA and UTMA are very similar. Both allow adults to open custodial accounts for minors and transfer assets to them without immediate tax consequences. The child takes full control of the account once they reach the legal age of adulthood in their state.
The UTMA builds on the UGMA by expanding the types of assets that can be transferred. Today, most states use the UTMA instead of the UGMA.
How To Open a CD for a Child
Opening a CD for a child is a straightforward process. The first step is finding a bank that offers custodial accounts, which is likely to be your existing bank. Once you find the right bank, follow the steps outlined below.
4 Steps To Opening a CD for a Child
- Open a custodial UGMA or UTMA account, listing yourself as the custodian and your child as the beneficiary.
- Deposit money into the account. Generally, this can be done physically via cash or check, or electronically via an ACH or wire transfer.
- Compare the bank’s CD options, including term lengths and annual percentage yields (APYs), to find one that fits your savings goals.
- Buy the CD and check in on the balance with your child over time (via physical account statements or an electronic portal). This can be a great opportunity to talk about saving and interest.
Reasons To Open a CD for Your Child
CDs are among the safest places to put your money. They offer guaranteed interest, zero market volatility, and are typically insured up to $250,000 per account by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions.
Because of their low risk, CDs are a great way to introduce kids to personal finance topics like the idea of saving and earning interest. A custodial CD account also gives you — the adult — control over the money until your child becomes an adult, while still letting them learn from the experience.
That said, if you’re saving for long-term goals like college or retirement, other options may offer better returns and tax advantages.
Drawbacks To Opening a CD for Your Child
The biggest drawback of opening a CD for your child is opportunity cost. CDs are low-risk, but they also offer lower returns than other long-term investment options. If you’re saving for college or another long-term goal, you may be better off with a higher-growth account.
Another consideration is taxes. Any interest earned in a UGMA or UTMA custodial account is taxable each year, which can slow down how quickly the savings grow.
Assets held in UGMA and UTMA custodial accounts are considered the named student’s assets on the Free Application for Federal Student Aid (FAFSA) form. Essentially, this means that if your child is holding a lot of money in a custodial account, it may reduce the amount of money they can receive through federal student aid.
Alternatives
If your child’s investment horizon is educationally oriented and long term, you should consider putting money into growth-oriented, tax-advantaged vehicles that offer higher after-tax returns than CDs. Below, you will find a few of these vehicles.
529 Plan and Coverdell Savings Account (Better for Education Savings)
If you are looking to put money aside for your child’s college education, a 529 plan is much better than a custodial CD account. It offers tax-deferred growth and tax-free withdrawals, assuming the funds put into it are used for qualified educational expenses.
There is one caveat — annual contributions are currently limited to $18,000, with a cumulative contribution cap ranging from $235,000 to $575,000, depending on the state.
Another potentially superior option to a custodial CD account is a Coverdell Education Savings Account (ESA), which can be used to pay qualified elementary, secondary and higher education expenses.
A Coverdell ESA offers the same tax advantages as a 529 plan, but annual contributions are limited to $2,000 per beneficiary, and eligibility is phased out at higher income levels. The account must also be used for a child under age 18.
Custodial Roth IRA (Better for Long-Term Investing)
Another alternative to opening a custodial UGMA or UTMA CD account for your child is to open a custodial Roth IRA. This is a great option if your child is earning some money and wants to invest.
Contributions can be invested in various ways and earnings are tax-exempt. Investment options include stocks, bonds, alternative investments and CDs. The annual contribution limit for a Roth IRA is currently the lesser of $7,000 or the child’s earned income.
High Yield Savings Account (Better for Liquidity)
A high-yield savings account is one of the simplest and accessible alternatives to a custodial CD. Typically offered by online banks, these vehicles offer much higher interest rates than traditional savings accounts.
Unlike custodial CDs, high-yield savings accounts let you access the money at any time, which can be helpful if the funds are needed sooner. That said, a high-yield savings account does not provide the same custodian/beneficiary guardrails as a custodial CD account.
Other Frequently Asked Questions About CDs for Children
The adult who opens the custodial account, typically a parent or legal guardian, has control over the assets held within the account until the beneficiary reaches adulthood. At this point, the beneficiary becomes the legal owner of all assets in the account.
Once you open a custodial account for a child, you cannot change the beneficiary. The child you opened the account for is entitled to the money. It cannot be transferred to another person.
To buy a CD for a child, you must do so via a bank that offers custodial accounts. While very common, not all banks offer custodial accounts.
Generally, you need the child’s legal name, date of birth, Social Security number and residential address to open a custodial account for them.
The ideal type of CD for your child depends on your primary objective. If simplicity is the priority, then a standard, zero-coupon CD with a maturity date that approximates the time until they reach adulthood. If mitigating exposure to interest-rate risk and bolstering earnings potential is the priority, then consider a CD ladder.
Writer Cassidy Horton contributed to this article.
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