How to Open a CD for a Child

A certificate of deposit (CD) can be a very low-risk way to save for the short-term future. If your child has some savings they’d like to invest or if you’d like to put some money aside for them, you can open one of the best high-APY CDs on their behalf.

Opening a CD for your child can be a great way to teach your child about the importance and benefits of saving without exposing money to market risks. However, alternative methods might be more tax- and cost-efficient if you're saving for college tuition.

In this article, we’ll explain why you would open a CD for your child, how to do it, and explore a few alternatives.

Opening a Certificate of Deposit (CD) for a Child

Certificates of deposit (CDs) are some of the safest investments around. The bank guarantees the return, and the money is insured against loss. Deposits are insured if the bank is an FDIC member or, if it's a credit union, a member of the NCUA. At credit unions, a CD may be called a youth share CD.

Information you may need to open a CD for a youth CD includes:

• Your Social Security number
• Your child’s Social Security number
• Proof of address

You'll also want to review the bank or credit union's youth CD rules. Some allow anyone up to the age of 25 to open a youth CD, while others require the minor to be under 18 or 17.

Custodial Accounts

A custodial account is an account that a custodian (such as a parent) controls on behalf of a minor (a person under 18 or 21 years old, depending on the state). The custodian must approve all transactions for the account until the child reaches adulthood, at which point all the assets in the account pass to them.

Custodial accounts come in two primary varieties: the Uniform Transfers to Minors Act (UTMA) accounts and the older Uniform Gift to Minors Act (UGMA) accounts. Their main distinction lies in the kind of assets you can contribute, but you can open a CD for your child with either type of account.

To open a custodial account, you must first find a bank or brokerage that offers them. Most parents will start with their current bank. If your bank doesn’t offer custodial accounts, quickly search online, and you’ll be presented with many options. Opening a custodial account is similar to opening a standard bank account, but you’ll also provide your child’s details.

Adding CDs

The final step is to add CDs to the custodial account. If you opened a custodial account with a bank or brokerage, log into their online banking portal to explore your CD options. From this point, taking out a CD is simply a matter of selecting the one that best suits your child.

Depending on your child’s age, you may want to involve them in some parts of this process. Taking out a short-term CD (three months, say) can be a good way to explain basic investing concepts to children and teach them the importance of financial discipline.

CDs for Children: Pros and Cons

Pros Explained

• Good first investment: Insurance coverage makes a CD an excellent investment for children. Using a CD, they can learn about the importance of saving, compound interest, and investing with minimal risk.
• Youth CD account benefits: As with youth savings accounts, banks and credit unions may offer youth CDs with special benefits or features, such as penalty-free withdrawals for specific purposes such as school expenses. Standard features include lower minimums to open the CD and the ability to add to the CD after opening.
• Higher APYs vs. savings: Your child will generally earn more interest in a CD than in a traditional savings account.

Cons Explained

• Limited access: While your child is still learning to save, it may be frustrating that a CD's funds are "locked up" for the term.
• Could reduce financial aid: Assets held in UGMA and UTMA accounts are considered the student's assets on the Free Application for Federal Student Aid (FAFSA). Holding a lot of money in a CD in a custodial account may reduce the amount your child can receive in federal student aid.
• Taxes may be due: Interest earned on CDs is taxed as ordinary and unearned income. Minors are required to report unearned income if earning more than $2,500 per year. If the CD generates more than this amount, you may need to file taxes for your child or include the earnings in your income. Speak with a tax professional for details.

Alternatives to a CD for a Child

While CDs offer a low-risk way to save for short-term goals, they are less ineffective when saving for your child's long-term future, such as college attendance. A CD's lack of liquidity may also be frustrating for children still learning the basics of saving and spending.

Savings Accounts

A child savings account allows your child to practice adding to savings over time, with the option to upgrade to a checking account with a debit card. Some of the best savings accounts for kids offer competitive savings rates and are also FDIC or NCUA insured.

529 Plan

A 529 plan is the standard choice for parents who want to save money for education expenses because of the tax-deferred growth and tax-free withdrawals these plans offer. You typically can't buy a CD in a 529 plan but invest in established funds.

Roth IRA

Another alternative is a custodial Roth IRA for kids if your children are earning money and want to invest it long-term. Contributions to these accounts can grow tax-free but can't exceed the amount the child has earned in a year. There are also annual contribution limits—for 2024, the limit is $7,000. FDIC-insured CDs are among the many investment choices a Roth IRA account may accept.

Frequently Asked Questions (FAQs)

The Bottom Line

Youth CDs are low-risk investments that can be excellent tools for teaching children ways to save and invest. A wide range of CDs for children offers numerous advantages, making CDs a solid gift idea for anyone, including children.

Be aware of potential drawbacks regarding financial aid and taxation as well as limited accessibility, before you determine if a CD is right for you.