Opening savings and CD accounts for children

By Sabrina Karl

For parents looking to help their children financially, custodial accounts provide the child a gift for the future while parents save on taxes today.

Custodial accounts are held in the name of a minor but are legally managed by an adult, typically a parent or grandparent. Deposits can be made into the account, interest is earned, and the custodian retains control until the child reaches the age of majority.

The advantage for parents is that special tax rules apply, allowing up to $1,000 in earnings per year to go untaxed and a second $1,000 to be taxed at the child’s rate. Only earnings above $2,000 will find their way onto the parent’s tax return.

Among the most common custodial accounts are savings and CD accounts at a bank or credit union. With these, parents can make a lump-sum gift or periodic deposits and the principal will accrue interest modestly but with almost risk-free safety.

Opening such an account is not much more difficult than opening one for yourself, and almost all banks and credit unions offer them. Just note that you’ll need to provide personal information and a social security number for both the child and the custodian.

You’ll also need to decide whether to open an UGMA (Uniform Gift to Minors Act) account or an UTMA (Uniform Transfer to Minors Act). UGMAs can hold deposit and brokerage assets and generally transfer to the child at age 18. UTMAs, meanwhile, can also hold assets such as real estate and typically remain custodial until age 21.

As always, shopping for a top rate is smart when opening a custodial savings or CD account. Once you’ve chosen a financial institution, their representatives can answer your questions on the age of majority in your state and which account will suit your child best.

What is a jumbo CD, and should I open one?

By Sabrina Karl

Anytime you shop around for CDs, you’ll notice that, in addition to their menu of standard options, some banks and credit unions also offer an array of jumbo certificates. What are these products and do they follow different rules than regular CDs?

As you can guess, a jumbo CD simply requires a much larger deposit than a standard CD. Traditionally, the threshold for jumbo CDs has been $100,000. But with no formal rules on the minimum, some financial institutions have taken marketing liberties to apply the term to $50,000 or even $25,000 CDs.

Also historically, jumbo CDs paid higher rates than standard CDs. But ever since deposit rates plummeted and then stagnated after the Great Recession, the spread between standard and jumbo rates has greatly compressed, to the point that jumbo CDs generally pay only a tiny fraction more than regular certificates.

Everything else about jumbo CDs works the same as standard CDs. A fixed interest rate and maturity term are specified at the outset, and the account must stay funded for the full duration. If cashed out early, a penalty will be applied, and whether this is the same as the penalty for regular CDs will depend on the bank.

So if you have a large sum to save in a deposit account, should you open a jumbo CD?

As always, your best bet is to simply shop for the highest rate you can earn, at an institution you feel comfortable with, for the amount you want to invest. Whether your top find is a jumbo CD or a standard one really makes no difference, since these are just marketing names.

In fact, you may be able to maximize your return and your flexibility (should you need the cash early) by opening multiple smaller CDs instead of one large certificate.

Should I name beneficiaries for my bank accounts?

By Sabrina Karl

When most people think about designating who’ll inherit their financial assets when they die, preparing a will comes immediately to mind. But for deposit accounts, naming a beneficiary can more easily and cost effectively transfer your funds to a new owner.

Most banks and credit unions allow you to name one or more beneficiaries for any checking, savings, money market or certificate of deposit account. The legal term for this is “payable on death”, and you might see it referred to as POD. Beneficiaries can also be designated for U.S. savings bonds.

When you specify a beneficiary, you still retain all ownership and rights associated with that account as long as you live. But when you die, the beneficiary becomes eligible to take possession of those funds as their own.

The advantage is that POD designations prevent those funds from entering the probate process of settling your estate, which can be costly, lengthy and burdened with paperwork. Instead, beneficiary designations override any will and are easily settled, at no cost. The beneficiary simply has to provide the financial institution with proof of identity and a certified copy of your death certificate.

Naming beneficiaries can be done immediately upon opening a bank account, via the signature card. But if you neglect to do this at the outset, you can always add a POD designee later. You’re also free to remove and change beneficiaries any time you like, though a new signature card will be required with each change.

Naming beneficiaries for your deposit accounts is one way to provide a gift to those who inherit your assets, as it significantly reduces the paperwork, time and energy necessary to make the transfers. But be sure to periodically review your various designations to ensure they remain up to date with your current preferences.

What is an add-on CD?

By Sabrina Karl

Smart savers shop around for a good deal before locking funds into any certificate of deposit. But the more CD shopping you do, the more you discover that it’s not just “one size fits all” out there.

The vast majority of CDs fit a standard formula: you deposit a lump sum, you agree to keep it there for a set term, and the bank agrees to pay you a fixed interest rate on your funds.

But anyone who shops around will quickly notice some specialty CD types, which tweak the general structure with added flexibility or requirements on one aspect of the certificate.

One of the simplest variations is an add-on CD. With these, you still make an initial deposit, and the bank still requires a set term in exchange for a fixed rate. The difference is that these CDs don’t limit you to the initial deposit. You can add more funds over time, without changing your term or the interest rate.

Many add-on CDs allow you to add as many deposits as you like, although they’ll likely require minimum additional increments and may stipulate a maximum that can ultimately be held in the CD. But some add-on certificates specify you can make just one or two additional investments over the CD’s lifetime.

Add-on certificates are well-suited to anyone saving toward a specific goal, like a down payment for a house or car, because they allow you to incrementally sock money away while earning more than you likely would from a savings account.

Just be sure to choose a term length that aligns with your savings goal, and check that the rate is competitive. If you can earn almost as much with a savings or money market account, you may be better served by the withdrawal flexibility those accounts offer.

How is a CD’s interest paid?

By Sabrina Karl

All certificates of deposit earn interest. But not all calculate it the same, or pay it out on the same schedule. Before locking into a new CD, it’s worth checking its interest terms.

First look for how frequently the CD will compound. Compounding monthly means one month’s worth of interest will be added to the balance each month. Then the next month, that new higher balance will be used for calculating interest.

Certificates generally compound daily, monthly, quarterly or even annually. The more frequently, the better, as it allows more chances to earn interest on accrued interest.

To see the impact of different compounding periods, take the example of a five-year CD with a 2.50% APR and an investment of $20,000. If compounding annually, the CD would earn $2,628 over the five years, while the same CD with daily compounding would earn $2,663.

Although the difference might seem small, it can sometimes help you choose between two otherwise equal CDs.

The other aspect of CD interest to consider is the ability to tap interest before maturity. Most CD buyers will keep their interest accumulating within the CD, growing the balance and benefiting from compounding.

But some CDs allow you to siphon the interest into a separate account each time the CD earns an interest payment. Here again, the terms of the CD will stipulate how often that happens. Though a CD might compound daily, most banks will apply interest payments monthly or quarterly.

If your goal is to earn the highest possible return over the life of your CD, you’ll want to choose a certificate that allows interest to accumulate and be compounded. But if instead you’d like to preserve your main investment while collecting interest payouts along the way, check the terms to make sure periodic interest withdrawals are allowed.