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 a CD on their behalf using a custodial account.

Opening a CD for your child can be a great way to teach them about the importance and benefits of saving without exposing their money to market risks. If you are looking to save money for college, however, alternative ways might be more tax- and cost-efficient in the long run.

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. Not only is their return guaranteed by the bank, but their money is also 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.

This makes CDs an excellent first investment for children—a place where they can learn about the importance of saving and investing with minimal risk.

Custodial Accounts

It’s relatively straightforward to open a CD for your child. To do so, you can use a custodial account. This 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 basic 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 to them, 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, do a quick search online, and you’ll be presented with plenty of 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. Taking out a CD, from this point, 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.

Alternatives to a CD for a Child

While CDs offer a low-risk way to save for short-term goals, they are not so effective when saving for your child's long-term future. If you want to start saving money to send your children to college, a CD might not be the best way to do that.

This is for several reasons. One is that assets held in UGMA and UTMA accounts are considered the student's assets on the Free Application for Federal Student Aid (FAFSA). This means that if your child is holding a lot of money in a CD in a custodial account, it may reduce the amount they can receive in federal student aid.

Holding the same amount of money in a 529 plan or a Coverdell Education Savings Account (ESA) might allow your child to access more aid. A 529 plan is the standard choice for parents who want to save money for education expenses, partially 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 you can roll some CDs into them.

Another alternative is a Roth IRA for kids. This can be a good option if your children are earning money and want to invest it for the 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 2023, the limit is $6,500. FDIC-insured CDs are among the many investment choices a Roth IRA account may accept.

Limitations of CDs for Children

While CDs are an excellent way to start your child on their financial journey, there are a few limitations. First, you must assign a beneficiary when you open the account—this cannot be changed. The child you originally designated as the beneficiary is entitled to the funds when the CD matures.

If you have more than one child and want to start each out with a CD, you'll need to open a custodial account for each one.

You'll also need to be aware of tax laws for CDs and minors. Interest earned on CDs is taxed as ordinary and unearned income—and minors are required to report unearned income if they earn more than $2,500 per year. If the CD generates more than this, you may need to file taxes for your child or include it in your income.

The Bottom Line

You can open a custodial account online and then add CDs to it on behalf of your child. Because CDs are such low-risk investments, they can be an excellent tool for teaching your children ways to save and invest.