Opening a CD for a Child

You can open a certificate of deposit (CD) for a child through a custodial account. An adult serves as the custodian, and the child is the beneficiary. This account is irrevocable; once deposited, it can’t be withdrawn. The beneficiary gains access to the funds upon reaching adulthood. It’s also possible to gift CDs to children.

headshot of Thomas J. Brock, CFA, CPA
  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Edited By
    Lamia Chowdhury
    Lamia Chowdhury

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

    Read More
  • Financially Reviewed By
    Timothy Li, MBA
    Timothy Li, MBA Headshot

    Timothy Li, MBA

    Business Finance Manager

    Timothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.

    Read More
  • Updated: August 14, 2023
  • 7 min read time
  • This page features 5 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite Annuity.org's Article

APA Brock, T. J. (2023, August 14). Opening a CD for a Child. Annuity.org. Retrieved June 22, 2024, from https://dev.annuity.org/personal-finance/banking/certificate-of-deposit/how-to-open-for-a-child/

MLA Brock, Thomas J. "Opening a CD for a Child." Annuity.org, 14 Aug 2023, https://dev.annuity.org/personal-finance/banking/certificate-of-deposit/how-to-open-for-a-child/.

Chicago Brock, Thomas J. "Opening a CD for a Child." Annuity.org. Last modified August 14, 2023. https://dev.annuity.org/personal-finance/banking/certificate-of-deposit/how-to-open-for-a-child/.

Why Trust Annuity.org
Why You Can Trust Annuity.org
Content created by Annuity.org and sponsored by our affiliates.

Annuity.org has been providing consumers with the tools and knowledge needed to confidently make financial decisions since 2013.

We accept limited advertising on our site to help fund our work, including the use of affiliate links. We may earn a commission when you click on the links at no additional cost to you.

The content and tools created by Annuity.org adhere to strict editorial guidelines to ensure quality and transparency.

Key Takeaways

  • A custodial account allows you to open a CD for a child.
  • As the custodian, you are responsible for overseeing the account until the beneficiary reaches adulthood, at which point, all assets in the account become the legal possession of the beneficiary.
  • Opening a CD account for your child can be a good way to introduce them to the concept of saving and investing without assuming undue risk.
  • There are alternative options available if you are looking to help your child save money in a more growth-oriented, tax-advantaged way, such as for college education or retirement.

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 otherwise), 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.

That said, know that a custodial account is irrevocable. So, once you make a deposit, you cannot withdraw it, and the child can access the money once they reach adulthood.

Laws on Custodial Accounts

The laws that underpin 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 for the creation of custodial accounts on behalf of minors, and both permit minors to receive gifts and avoid the tax consequences until they reach the legal age of adulthood in their state.

The UTMA largely reflects the language of the UGMA, but it broadens the scope of the assets considered to be gifts. For most states, the UTMA has replaced 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

  1. Open either a custodial UGMA or UGMT account, designating yourself as the custodian and your child as the beneficiary.
  2. Deposit money into the account. Generally, this can be done physically via cash or check, or electronically via an ACH or wire transfer.
  3. Explore the bank’s CD offering and compare the terms and annual percentage yields (APYs). Ultimately, you need to identify the instrument that best aligns with you and your child’s objectives.
  4. Purchase the CD and periodically monitor the balance with your child (via physical account statements or an electronic portal). The process will be a great, ongoing educational experience.

Reasons To Open a CD for Your Child

CDs are among the safest investment vehicles in which you can put your money. They exhibit zero volatility, offer guaranteed interest and, if structured properly, are fully insured up to $250,000 for individual accounts. The Federal Deposit Insurance Corporation (FDIC) insures CDs issued by banks, and the National Credit Union Administration (NCUA) insures CDs issued by credit unions.

Given their low-risk nature, CDs are an ideal instrument for novice investors wading into the world of saving and investing. Moreover, opening a custodial CD account is a smart, practical way to teach a child about personal finance. Doing so ensures you retain decision-making authority, while allowing you to include them in the process of opening the account, handling administrative matters and evaluating performance.

But if you are looking to help your child save money in a more growth-oriented, tax-advantaged way, there are better options available. This is particularly true when it comes to saving for college education and retirement.

Read More: Best Savings Accounts for Kids and Teens in 2023

Drawbacks To Opening a CD for Your Child

The primary drawback to opening a CD for your child is opportunity cost. Unless your child’s investment horizon is short to intermediate and noneducational in focus, there are much better, higher-yielding investment options to consider.

A secondary, related drawback pertains to taxes. The CD interest earned in a UGMA or UTMA custodial account is taxable as it accrues, which can have a meaningful drag on wealth accumulation.

Did You Know?

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.

Better Options 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 $17,000, with a cumulative contribution cap ranging from $235,000 to $550,000, 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 the former’s contribution limits are much lower. Additionally, a Coverdell ESA is only available to families under certain income limits and only applicable to beneficiaries under the age of 18.

Better Option 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 $6,500 or the child’s earned income.

Better Option for Liquidity

The most straightforward, liquidity-enhanced alternative to a custodial CD is a high-yield savings account. Typically offered by online banks, these vehicles offer much higher interest rates than traditional savings accounts.

While a custodial CD account may offer a higher interest rate than a high-yield savings account, the money is not available to the beneficiary until they reach adulthood. A high-yield savings account, alternatively, allows for withdrawals at any time. 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

Does the custodian or child own the money in the CD?

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.

Can you change the beneficiary of a custodial 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.

Do all banks allow you to buy a CD for a child?

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.

What info about the child do you need to open a CD for them?

Generally, you need the child’s legal name, date of birth, Social Security number and residential address to open a custodial account for them.

What type of CD is best for children?

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.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 14, 2023

5 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Fidelity. (2023, January 26). Must-Know Facts About UGMA/UTMA Custodial Accounts. Retrieved from https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids
  2. Internal Revenue Service. (2023, January 26). Topic No. 310 Coverdell Education Savings Accounts. Retrieved from https://www.irs.gov/taxtopics/tc310
  3. Consumer Financial Protection Bureau. (n.d.). Annual Percentage Yield Calculation. Retrieved from https://www.consumerfinance.gov/rules-policy/regulations/1030/a/
  4. Federal Deposit Insurance Corporation. (n.d.). Deposit Insurance. Retrieved from https://www.fdic.gov/resources/deposit-insurance/
  5. National Credit Union Administration. (n.d.). Share Insurance. Retrieved from https://www.mycreditunion.gov/share-insurance