Guide To Setting Up Savings Accounts for Grandchildren

We all want the best for our grandchildren. That includes wanting them to be prepared for a successful financial future.

One of the best ways to help with this goal is by setting up a savings account for your grandchildren. Research has shown that young people who have savings accounts from an early age are more likely to be financially successful as adults.^[1]

In this guide to setting up savings accounts for grandchildren, we’ll explore the benefits of saving early for your grandkids’ financial futures, as well as how to pick an account that best suits your needs.

Why You Should Create Savings Accounts for Your Grandchildren

There are many reasons why setting up savings accounts for grandchildren may be a good idea.

For one, a University of Kansas study found that young people who had savings accounts by the time they were 17 were more likely to continue saving, had a diversified investment portfolio, and accumulated more financial assets by the time they turned 23 than those who didn’t.^[1]

In addition, by setting up savings accounts for your grandchildren, you could make a positive contribution to their financial education. With a savings account in place, kids are more likely to learn important lessons about how saving and investing work. That includes understanding the power of compound interest, allowing assets to grow faster by reinvesting the interest earned in an account.

By opening a savings account on their behalf, you may encourage your grandkids to be financially literate and understand the value of money. Kids who grow up with financial responsibility may be less likely to mismanage their money as adults.

By creating a savings account now, you may lay the foundations for a healthy and wise relationship with money that will last a lifetime.

What Type of Savings Accounts Can You Open for a Grandchild?

There are several options to explore when opening a savings account for a grandchild. In choosing the right one for your needs, consider your savings goals for the account. Do you want to save money specifically for your grandchild's college education? Or do you simply want to receive return on investment?

Traditional Savings Accounts

Traditional savings accounts are popular options for grandparents looking to start their grandchildren on the path toward saving money. Although traditional savings accounts may offer a smaller return than some of the other options mentioned in this guide, there are plenty of benefits to these types of accounts.

Traditional savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to the allowed amount. That means, in the very unlikely case of a bank failure, the FDIC would refund the amount of money in the account (to the per-depositor limit) or transfer it to a similar account at a different bank.

Savings accounts are also popular because of their flexibility. The funds in the account can be withdrawn for any purpose at any time. However, your bank may impose a limit of fee-free withdrawals per month.

Some banks offer special savings accounts designed with children in mind. For example, PNC offers the S is for Savings® kids savings account. This account allows adults to monitor the deposits, withdrawals, and transfers to and from the account. At the same time, the child account holder will enjoy an interactive online banking experience that includes financial lessons from the creators of Sesame Street^®.

Certificates of Deposit (CDs)

Certificates of deposit are savings accounts that tend to pay higher rates of interest than typical traditional savings accounts. However, in return for this potentially higher rate, CDs require you to leave money deposited until a specified maturity date. If you withdraw funds before this date, the bank may penalize you by forfeiting all or some of your interest earnings.

That said, CDs may be an appropriate choice if you want to save long-term for your grandchildren. That’s especially the case because, typically, the longer the term of the CD, the higher the interest rate the bank tends to pay.

If you anticipate needing to withdraw some funds periodically, it’s also possible to use a CD laddering strategy. Using this strategy, you use multiple CDs with staggered maturity dates to take advantage of long-term rates while still having access to some of the funds on a scheduled basis.

As with traditional savings accounts, the FDIC also protects certificates of deposit to the specified limit.

Custodial Accounts

Custodial accounts are another type of account appropriate for grandparents to open for their grandchildren. These types of accounts are managed by an adult family member on behalf of a minor (someone under the age of 18 to 21, depending on state law). Control of the account passes on to the beneficiary upon reaching the age of majority. 

Funds from a custodial account may be withdrawn for any purpose as long as it’s deemed for the benefit of the minor beneficiary. This means custodial account funds can be used for tuition payments, clothing, and even a teenager’s first car.

There are two main types of custodial accounts: those made possible by the Uniform Transfer to Minors Act (UTMA) and those made possible by the Uniform Gift to Minors Act (UGMA).

The custodian and any other adult who would like to contribute to an UTMA account can deposit cash, securities, annuities, real estate, insurance policies, works of art, and practically any other kind of asset.

On the other hand, UGMA accounts are limited to gifts of cash, securities, insurance policies, and annuities.

PNC offers UTMA custodial accounts that allow you to save for your grandchild’s financial future. PNC’s custodial accounts offer unlimited contributions and unlimited contribution amounts, and there are no income qualifications necessary to open an account.

529 Education Accounts

529 plans are tax-advantaged investment accounts in which grandparents may invest for their loved ones’ future education expenses. The funds from 529 plans can be used to pay for qualified expenses at most accredited colleges and universities. They can also be used to cover some tuition expenses at private elementary and secondary schools or for apprenticeship programs for kids who decide to take up a trade rather than attend a four-year college.

529 plans come with tax advantages — deposited funds are tax-deferred, and many qualified withdrawals are not subject to federal income taxes (as well as some state income taxes).

Although 529 plans are more rigid in what the funds can be used for, they also offer flexibility in that the account owner may decide to change the beneficiary at any time. By contrast, UTMA and UGMA accounts cannot be reassigned.

And if your grandchild decides not to go the traditional four-year university route, they can still use their 529 plan to cover the cost of community college, as well as qualifying trade schools, vocational and certificate programs, and continuing education classes. 

Choosing the Right Savings Account for Your Grandchild

When selecting a savings account for your grandchild, there are some considerations to keep in mind:

• Are you saving or investing for their college tuition? College tuition can be among the biggest expenses your grandkids will ever have to pay. If you want to save or invest money specifically for this goal, you may want to consider investing in a 529 plan, which is designed specifically to be used for education expenses at most accredited colleges and universities.
• Are you looking for return on investment? If your primary goal is seeking returns,  you may want to consider investing in stocks and other assets in a custodial UTMA or UGMA account. However, it’s important to always keep in mind that although investments may offer the potential for better returns, there’s plenty of risk.
• Do you want them to receive an early education in finance? If imparting financial literacy is your goal for your grandchildren, a child-oriented savings account such as PNC’s S is for Savings® may be your best bet. PNC’s child accounts offer interactive learning experiences to help your grandkids grow up with a good understanding of money.
• Do you want complete control over the funds? If you want to be able to control the funds in the account, consider a custodial account. With this type of account, the adult custodian is in control of the management of funds.
• Do you want your grandchild to have access to the funds? When you open a traditional savings account for your child, they may be able to access the funds deposited — albeit under your watchful eye. Some accounts oriented toward kids and teenagers feature ATM or debit cards that they can use to spend their money.

When selecting an account, you may also want to consider the interest rate paid by the issuer, as well as any extra features such as mobile banking and automatic transfers.

The Bottom Line on Savings Accounts for Grandchildren

Setting up savings accounts for grandchildren may be among the best financial decisions you make. In doing so, you may set up your young loved ones for a lifetime of financial literacy and responsibility, in addition to providing them with funds they can use for tuition expenses or other important purchases.