Banking vs. Investing for Kids: Pros, Cons and When to Do Which

Parents don’t stop caring for their children once they reach adulthood. You’ll be around for your kids as they grow and leave home, offering a hug, a listening ear and encouragement. You may also plan to be there for your kids financially, even after they turn 18. One way to do this is start early by putting money aside in an account for your kids.

You can choose to open a deposit account (meaning a bank account like checking or savings) or investment account (or both) for your child. While both options can help you build a financial gift for your little one, they can offer different advantages and disadvantages.

How Banking vs. Investing for Kids Works

If you’re planning to put money toward your child’s future, you can choose to do this either through saving or investing money. Either option can be the right fit for your family, depending on what benefits are most important to you. Here's more on what investing for kids really means.

Savings and checking accounts

Many banks offer the option to open an account for a minor. You may be able to open either a custodial account or a joint account. A custodial account holds money that legally belongs to the child, but an adult custodian manages the account until the child comes of age (typically at age 18 or 21). Contributions to a custodial account become the child’s property, so they are irrevocable.

On the other hand, if you opt for a joint account, you and your child share ownership of the money in the account.

Age minimums can vary depending on the bank and type of account. For example, Chase offers a debit card for kids as young as 6 years old; U.S. Bank offers savings accounts for minors at any age and joint checking for children ages 13-17; and Wells Fargo allows minors to open an individual savings account starting at age 13.

Bank accounts are popular with parents because they are convenient to use and secure. You might like the idea of practicing banking habits with your child, such as teaching them how to make a deposit or how to use a debit card.

Investment account

In this article, when we talk about a child’s investments, we’re talking about a UGMA account (offered in each state via the Uniform Gifts to Minors Act). A UGMA can be simpler and cheaper to open than a trust, and you can use a UGMA to hold cash and securities (e.g., stocks, bonds). With some UGMA accounts, you can hand-pick your own exchange-traded funds (ETFs) to set up the account to your own specifications. If it’s overwhelming to add structuring UGMA assets to your to-do list, options like a UGMA through Fabric by Gerber Life have created portfolios for you to choose from.

A big advantage of investing is the opportunity to take advantage of market growth. The S&P 500 index is an important reference point for market performance, and its historical track record has pointed to a 10% annualized return, with dividends reinvested. Past performance isn’t a promise of future results, but many parents who are exploring investing for their kids hope to see their money grow more in the market than in a bank account.

A UGMA account also offers some tax advantages. The “Kiddie tax” rules apply to a UGMA because it belongs to the child. For 2024, the first $1,300 of a child’s unearned income (e.g., investment gains) is tax-free, and the next $1,300 is taxed at the child’s rate rather than the parent’s rate, which usually means a lower tax bracket. Earnings above the $2,600 mark are taxed at the parent’s rate.

A UGMA account is a custodial account, so you can’t take back contributions and the custodian has a duty to manage the money in the child’s best interest. Once your child is old enough to take control of the account, they can continue to invest in the market or withdraw the money for anything they choose.

Savings Account Pros and Cons

Savings account pros include:

• They can be easy to open.

• Some account options are available at any age.

• You can opt for a joint account to have more access and fewer restrictions on how to

  use money.

• You can give your child opportunities to practice depositing or withdrawing money.

• Depending on the account type, you may be able to give your child access to a debit

  card.

• Money in a bank account is insured up to $250,000 by the FDIC—so you won’t risk

  losing money based on market performance.

Some bank account cons include:

• Savings account interest rates may be lower than inflation rates, which could weaken the purchasing power of the money over time.

• You may miss out on potential market growth.

• You won’t get tax advantages on money in a savings account.

• You or your child may face greater temptation to spend money in the account.

• A joint account might be factored into your assets in the event of a divorce settlement.

Investment Account for Kids Pros and Cons

Investing through a UGMA account for your child also has advantages and potential disadvantages to consider.

Some UGMA account pros include:

• They can be easy to open.

• You may get some tax advantages on account earnings.

• Investing may offer greater potential growth than bank savings account interest rates.

• The funds legally belong to the child, so you can feel assured that your child will get to use the money you contribute to the account.

A few possible cons to consider include:

• Some UGMA accounts have fees, such as fees on certain investment transactions.

• As with any type of investment, there is a potential for losses if market performance goes down.

• You may face more restrictions and record-keeping if you want to use funds in a UGMA before your child comes of age (in your child’s own best interests), as compared to using money in a joint bank account.

When you’re planning finances for your child, you may want to consider factors like your risk tolerance, potential growth opportunity and how you want to teach your child about money. Setting up savings or investment accounts for your child early on may become a meaningful gift when they’re older.

Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. You cannot directly invest in an index. Index returns are not reduced by management or other fees. Past performance is not indicative of future results. Investing in securities involves the risk of loss. Age of majority varies by state. Learn more at meetfabric.com/UGMA.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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