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Can a Grandparent Open a Savings Account for a Child?

January 18, 2021
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Sootchy Team

Starting a savings plan for your grandchild sets up limitless possibilities for them. Learn how you can start a savings account for your grandchild.

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Can a Grandparent Open a Savings Account for a Child?

There are lots of ways in which grandparents around the country care for their grandkids – by feeding them, doting on them, giving them money. As the cost of college continues to rise substantially year after year, many grandparents are turning to a new form of familial love: the establishment of a savings account. When started early in a grandchild’s life, savings accounts can offer a great opportunity to build up funds over time and help cover the undoubtedly huge cost of college tuition down the road. As with many financial actions, however, there are a lot of minutiae to consider, starting with the basic question, “Can a grandparent open a savings account for a child?” For more on this topic, including what to look for in a savings account, continue reading as the college savings plan experts at Sootchy share their insight on the matter.

What to Know When Opening a Savings Account for a Grandchild

For grandparents who are able to help their grandchildren with future expenses, opening a savings account can ensure the funds are protected and may even allow them to grow over time. While any grandparent can open a savings account for a child, there are a few points to keep in mind before finalizing any decision regarding a new savings account, points that can have a big impact when college rolls around.

Firstly, you may want to consider putting the funds in your own name – or better yet, your child’s – rather than your grandchild’s. Although it may not seem to make sense at first, there are some good reasons to do so; for instance, many states mandate that any teenager with funds in their name must be given control over those funds when they turn 18, and we all know how impulsive teens can be when it comes to money.

Secondly, even if your grandchild acts responsibly and saves all the money in their account for things like college tuition, having any significant sum of money in their name could severely (and unnecessarily) limit your grandchild’s financial aid eligibility. When filing for federal aid, 20% of a student’s assets are added to their estimated family contribution (EFC), which is how the government determines how much money they should receive; in other words, the more money they seem to have, the less they’ll be given when aid is awarded.

Funds in a grandparent’s name are not considered in federal aid decisions (though payments from one of these accounts may be), and parental assets only add 5.64% of their value to a grandchild’s EFC, so putting the account in your child’s name should limit any impact on financial aid.

Types of Savings Accounts Grandparents Can Open for a Child

Whether you’re headed to your local bank or browsing options online, any grandparent is sure to find that there are tons of ways they can start saving for their grandchild, from the traditional savings accounts offered at banks to a variety of investment portfolios, each with different perks. The following are some of the most popular options for a grandparent opening a savings account for a child:

529 Plans

To help families save for college, the federal government created the 529 plan – also called a qualified tuition plan – which creates tax benefits for those setting aside money for education. Should you open a 529 plan for a child, the money in the account will grow tax-free, as long as it’s spent on qualified education expenses. Many states also offer their own tax breaks for those making contributions to these plans, and you can choose any state’s plan when picking the right account for you.

Traditional Savings Accounts

The simplest way to open a savings account for a child is to start a conventional savings account at your local bank. These accounts won’t lose value, and they’re easy to access, but they also don’t offer much in the way of growth. Interest rates on traditional savings accounts are often very low, and if they don’t beat the rate of inflation, the money in the account could actually go down in value.

UGMA/UTMA Accounts

Both UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfer to Minors Act) accounts allow a grandparent to save money for a child, and they also come with a variety of investment options. The grandparent can also manage the money in the account, but control will transfer to their grandchild when they reach the proper age – typically 18 or 21. Income above $1,050 will also be taxed, potentially hurting any gains you might see on the account.

Certificates of Deposit

Like traditional savings accounts, certificates of deposit – better known as CDs – are an easy way to save some money while earning a bit from your investment. One benefit of CDs is that they generally come with higher interest rates than savings accounts, and with long-term goals like college, you can use long-term CDs, which tend to have the highest rates of interest. However, you won’t be able to use the money during that time, and you lock in the interest rate when you first open the account.

Opening a College Savings Account for a Child Is Easy with Sootchy

If the prospect of opening a new savings account, picking investments, managing growth, and avoiding potential pitfalls sounds complicated, that’s because it often is, but with help from Sootchy, you can easily open a 529 college savings plan for your grandchild or contribute to one of your family’s plans. Learn more by visiting us online or downloading the Sootchy app today.

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