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Will my newborn need their own savings, or can we add to what we already have?

If you’re welcoming a new child into your family, you may find yourself wondering if a newborn should have a savings account — and if so, what kind. As with most things, there’s not a one-size-fits-all answer, and the best course of action for you depends on what you hope to achieve.

Opening a traditional savings account.

One path you could take is to start a traditional savings account for your child. This type of account is typically designed to generate interest on the money deposited into it over time. Depending on how you choose to set up this kind of account, you have the option to make yourself a custodian of the account until the child is of legal age, or you can make it a joint savings account that you and your child can both access.

These kinds of accounts can eventually be a great way to teach kids about managing money and introduce them to the banking system once they’re old enough. They can also serve as an opportunity to save for future expenses, like paying for the child’s first car, covering the cost of braces, or buying sports equipment. Since money deposited early will benefit from compounding interest, this could be a great way to give your child a head start.

Saving for higher education.

If your goal is to start saving money to help pay for college, you may want to consider a different type of account, such as a 529 Plan. These plans are state-sponsored, tax-advantaged savings accounts that can be used to pay for higher education expenses. They offer an excellent way to save for college, since withdrawals are exempt from federal income tax when they’re used for qualified education expenses. Even better, as of 2024, you can roll any unused 529 funds into a Roth IRA in the recipient’s (in this case, your child’s) name. There are some conditions that apply, but it’s still a nice option to have.

Another option to explore is a Coverdell IRA, which is an education savings account that differs from 529 Plans in that can also be used to cover the costs of private, elementary and secondary education as well as for college. U.S. Savings Bonds also offer a low-risk modest return. Certain types of these bonds offer tax benefits when used for qualified education expenses.

Choosing the right option.

Regardless of the type of account you choose, if you elect to open one, be sure to do your homework first. Fees, features and interest rates vary across different kinds of accounts. If you want to open a traditional savings account, for example, it makes sense to look for one with low or no fees and a good interest rate. You may also want to explore whether the account offers options that may make sense down the road, such as the ability to add a debit card for your child or switch it to a different kind of account.

In addition to the financial benefits of starting a savings account for your new child, as they get older, these accounts can also offer a great opportunity to teach them about financial literacy. Helping kids learn to be responsible with money at an early age is something that can benefit them for their entire life.

As you can tell, when it comes to starting a savings account for your child, you have options — including the option to not open one. For example, if you’re trying to focus on paying down high-interest debt, it may make sense to stay the course on that until your debt is dealt with. As long as you make the right decision for your situation, you and your new child will benefit.

Disclosures:

Commerce does not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.