How to open a CD account for your child: Complete step-by-step guide
A certificate of deposit (CD) can be a wise choice for building your child’s savings while helping you begin teaching them about finances. CDs are relatively low-risk, and they can be an optimal way to build savings. Opening a CD for your child may not be as straightforward as you might think. It’s important not to let that cause delays, as the Federal Reserve’s current monetary policy makes it a good time to lock in rates. Our guide outlines the start-to-finish process for opening a CD account for your child, from choosing the right bank to monitoring the account. Read on to learn how to open a certificate of deposit for your child.
What you’ll need: Documentation checklist
Missing documentation is a common problem when opening a CD for kids. You want to avoid delays, as that may impact your rate.
Here is what the FDIC requires to open the account.
For the custodian: You must provide a valid government-issued ID, such as a driver’s license, passport, or military ID. A Social Security number (SSN) and proof of address, like a utility bill or brokerage statement dated within the past 60 days, are also required.
For your child: Your child will likely not have a government-issued ID, so a birth certificate or other age-verification document is required, along with a SSN. The birth certificate serves a dual purpose: the bank will need to verify your custodial relationship with the child.
Financial requirements: The funds you intend to deposit, whether you’re opening at a brick-and-mortar branch or an online bank. Don’t be surprised if a local bank requires at least $1,000 to open a CD, but many online banks will have no minimum deposit requirement.
How to open a CD account for your child: Steps to follow
Opening a CD for a minor is a tangible way to teach them about saving, earning interest, and investing. With that in mind, you’re seven steps away from opening your child’s CD account and locking in a competitive rate.
Step 1: Choose your CD account type
When comparing available rates, you may notice several types of CD accounts to consider. The CD types all operate similarly from an earning standpoint, but they differ in how they’re structured.
Standard custodial CD: A custodial CD is the most straightforward option for CDs for kids. You have control of the account until the child reaches the age of majority, which is 18 in most states, but several states go up to 21. If you want simplicity, a standard custodial CD is often the wisest choice.
UGMA/UTMA CD: Uniform Gifts to Minors (UGMA) or Uniform Transfers to Minors (UTMA) are suitable and are still custodial in nature. UGMA/UTMA CDs have no contribution limits, which offers some tax benefits. Interest may be subject to kiddie tax rules, meaning the first $1,350 in interest is tax-free, with the next $1,350 taxed at the child’s rate, per the IRS.
Joint CD: Joint CDs are less common for children’s accounts, but they are available. Not every bank offers joint CDs for kids, so ask if you’re interested.
Regardless of the type of CD you select, all CDs have the same $250,000 FDIC coverage, per depositor, per institution.
Step 2: Compare and select a financial institution
Comparing rates is essential when shopping for a CD. You don’t want to leave potential earnings on the table by forgoing your research.
Rate comparison: Research both local and online banks for an account. CD rates are often higher at online banks since they don’t have the same overhead as brick-and-mortar branches. Depending on the term length and deposit, you may find rates around 5% online, which is up to 2% higher than local options.
Minimum deposit: Verify the minimum deposit requirement to open an account at the stated rate. It’s fair to expect online institutions to require up to $500, but physical banks may require $1,000.
Term options: CD terms vary greatly, from several months to five or more years. It’s best to align the term length with your specific goal. If your goal is uncertain, selecting a 1-2-year CD is prudent. Is saving for college the goal? You may want to opt for a CD term of at least five years.
Custodial account support: Not all banks support custodial CDs. Institutions that do include Aliant Credit Union, Ally Bank, Discover, and Marcus by Goldman Sachs.
Don’t overlook verifying that a bank is an FDIC member. You can use the FDIC BankFind tool to determine whether a bank is an FDIC-insured institution.
Step 3: Select your CD term length
Aligning the CD you select with your goal is important to make sure it meets your needs. CDs aren’t liquid accounts, and you don’t want to pay to access funds early.
Short-term: Short-term CDs are best for near-term needs and generally last 3-12 months. This gives you more flexibility, albeit with a slightly reduced interest rate. Short-term CDs are also suitable in an environment where rates may increase in the near future.
Medium-term: If you’re uncertain when you will need the funds, but it won’t be in less than a year, you may want to select a 1-3 year CD. The longer term will provide a higher interest rate, without locking up funds for too long.
Long-term: Is the cash meant for college or another long-term need? Selecting a 3-5 year CD, or longer, provides the highest available rates.
Withdrawing funds early will trigger an early withdrawal penalty, which can erode up to 12 months of interest, depending on the term length. A CD ladder is a practical way to avoid that, as it provides predictable access to funds without sacrificing higher rates.
Step 4: Complete the online or in-branch application
Opening a CD account for kids requires a specific application process. It’s not difficult, but it’s important to follow all the steps for success. Here’s how to open a CD account for your child online:
- Go to the bank’s website and select CDs
- Choose “minor’ or “custodial” as the account option
- Enter your information
- Enter your child’s information
- Upload documentation paperwork and/or IDs
- Select CD length and deposit amount
- Review APY, maturity date, and early withdrawal penalties
- Agree to the disclosures and submit the application
- Receive confirmation email
Here’s how to open a certificate of deposit for your child at a local bank:
- Schedule an appointment with a personal banker
- Bring all physical documentation, like IDs and other paperwork
- Meet with the banker
- Provide copies of the necessary paperwork
- Review and sign account agreements
- Make an initial deposit
- Receive account paperwork and establish online access
Opening an account online is usually faster, but a brick-and-mortar institution can give customized guidance for more nuanced situations. Reviewing the Consumer Financial Protection Bureau’s (CFPB) guidance on opening a bank account is helpful if you have further questions.
Step 5: Review account terms and lock in your rate
Understanding how your kid’s CD works is essential. Here’s what to confirm when reviewing the new account:
- Confirm the APY matches the advertised rate
- Verify what you’ll receive at maturity
- Determine compounding frequency; daily is best
- Understand how long your grace period is before the CD auto-renews
- Confirm the account is titled correctly
- Understand the early withdrawal penalty; it’s fair to expect three to six months’ worth of interest for shorter-term CDs and up to 12 months for those over a year in term
It’s advisable to save all the paperwork you receive, including the Truth in Savings disclosure, for recordkeeping purposes.
Step 6: Fund your account
Upon opening the CD you will need to fund it. Here are the four main ways to fund a CD.
Electronic transfer: This is the most common way to fund a CD account. Funds move from an existing bank account and hit the CD within several business days.
Wire transfer: Wires often occur the same day, but there are fees for this convenience. The sending and receiving banks may each charge you upwards of $30.
Check deposit: Mailing a check or using mobile deposit is another option, but expect it to take at least several days to hit the new CD.
Cash deposit: If you’re opening the CD at a local bank, cash deposits immediately hit your account, with no cost.
Regardless of your funding method, make sure deposits clear by any applicable rate-lock deadlines.
Step 7: Set up monitoring and plan for maturity
A kid’s CD may feel like a set it and forget it account, but active management is advisable. It’s best to do the following after opening and funding the account:
- Activate online access and download the bank’s app
- Add the account to your personal finance app of choice
- Make a plan for what to do with funds at maturity, such as rolling into another CD or opening a high-yield savings account
- Create a calendar reminder for 30-60 days before maturity to review current rates
- Involve your child at an age-appropriate level to help them learn the power of saving
As your child ages, it’s important to remember the account will automatically transfer to them upon reaching the age of majority. Ages range from 18 to 21, depending on your state of residence.
Frequently asked questions
Opening a CD for a child is a fantastic way to teach them about money. These are common questions people have about opening such accounts.
Traditional CDs don’t allow you to deposit more money after opening, but an add-on CD gives that ability, albeit at a lower rate.
A CD is a good investment choice for children as it helps them learn about saving money and earning interest.
A CD is a good investment choice for children as it helps them learn about saving money and earning interest.
Yes, if an online bank is an FDIC member, it offers the same protections as a brick-and-mortar bank that is an FDIC member.
Yes, grandparents can open CDs for their grandchildren, but they commonly need to act as the custodian.
CDs for kids: Bottom line
Opening a CD for a child can take as little as 20 minutes, but it requires correct documentation. Interest rates fluctuate, and the current rate environment may make locking in rates now more attractive than waiting. If you’re on the fence, start collecting the required documents and compare rates at three to five banks to identify the best option. You can start researching CD rates today to find the highest-paying accounts. If you’re considering a large deposit, consider speaking with a financial advisor to tailor it to your needs.
