You can open a savings account for a grandchild in your name, or set up a custodial account that transfers to them at a set age

The simplest route is to open a regular savings account at a bank or credit union and deposit money into it yourself. You own the account, you control it, and you can withdraw money whenever you want. This works well if you plan to manage the account until your grandchild reaches adulthood, then hand it over or transfer the balance to an account in their name.

The second option is a custodial account, which you open in your grandchild's name with yourself as the custodian. The money belongs legally to your grandchild from the moment you deposit it, but you manage it until they reach the age of majority in your state—usually 18 or 21. At that age, the account automatically transfers to them. This option has tax advantages if the account earns interest or investment returns, because some of that income may be taxed at your grandchild's lower rate rather than yours.

A third option, available in most states, is a 529 college savings plan. This is a tax-advantaged account specifically for education expenses. You can open one in your grandchild's name, contribute money, and the earnings grow tax-free as long as the money is used for college, trade school, or certain other education costs. If your grandchild doesn't go to college, you can transfer the account to another family member or withdraw it (though you'll owe taxes and a penalty on the earnings).

Key Takeaways

  • A regular savings account in your name is the easiest to set up and gives you full control, but the money doesn't legally belong to your grandchild until you transfer it.
  • A custodial account (UGMA or UTMA) puts the money in your grandchild's name from day one, which can lower taxes on interest earned, and automatically transfers to them at age 18 or 21.
  • You'll need your grandchild's Social Security number to open a custodial account or 529 plan, and you'll need to show ID and proof of address to open any account.
  • Most banks and credit unions let you open an account online or in person, and minimum deposit amounts range from zero to a few hundred dollars depending on the institution.
  • Interest rates on savings accounts are low but vary by bank, so comparing rates before you open can mean the difference between earning a few dollars and earning almost nothing over time.

What documents and information you need to bring

To open any account, you'll need your own government-issued ID (driver's license or passport) and proof of your current address, such as a utility bill or bank statement dated within the last 60 days. You'll also need your grandchild's Social Security number if you're opening a custodial account or 529 plan. If you're opening a regular savings account in your own name, you only need your own information.

Some banks ask for a phone number and email address for the account. A few may ask for your employment information or annual income, though this is less common for savings accounts than for checking accounts or credit products. If you're opening the account online, you may be able to upload photos of your documents rather than bringing originals into a branch.

For a custodial account, you'll also need to decide which state's law will govern the account. Most people choose their own state, but some choose the grandchild's state of residence. The bank will guide you through this choice when you open the account.

How to choose between a regular account and a custodial account

Choose a regular savings account in your name if you want maximum flexibility and control. You can withdraw money at any time without restriction, change your mind about the gift, or use the money for your own needs if circumstances change. This is also simpler from a tax perspective—you don't have to file any special forms or track the account separately on your taxes. The downside is that the money is legally yours, not your grandchild's, so if you pass away, the account becomes part of your estate and may be subject to probate or estate taxes.

Choose a custodial account if you want the money to belong to your grandchild from the start and you're comfortable with it transferring to them automatically at age 18 or 21. Custodial accounts have tax advantages: if the account earns interest, some or all of that interest may be taxed at your grandchild's rate (which is usually lower than yours) rather than your rate. The trade-off is that once your grandchild reaches the age of majority, the account is theirs to use however they want—you lose control. You also cannot take the money back if you change your mind.

Choose a 529 plan if your goal is specifically to save for college or other education. The earnings grow tax-free, which can add up to significant savings over 10 or 15 years. However, if your grandchild doesn't go to college, you'll owe taxes and a 10% penalty on the earnings when you withdraw the money (though you can transfer the account to another family member without penalty).

Where to open the account

You can open a savings account at nearly any bank, credit union, or online bank. Banks and credit unions are brick-and-mortar institutions with physical branches where you can walk in and speak to someone. Online banks have no physical locations but often offer higher interest rates because they have lower overhead costs. The tradeoff is that you handle everything by phone, email, or website—there's no one to talk to in person if something goes wrong.

For a custodial account, most major banks and credit unions offer them, but not all online banks do. Call ahead or check the bank's website to confirm they offer UGMA or UTMA accounts (the legal names for custodial accounts). For a 529 plan, you can open one through your state's plan (each state runs its own), or through a brokerage firm like Vanguard or Fidelity. Your state's plan is often the simplest option, and some states offer tax deductions on contributions if you use the state plan.

If you're not sure where to start, your own bank is a reasonable choice—you already have a relationship there, and they can walk you through the options. Credit unions often have lower fees and higher interest rates than large banks, so it's worth checking if you belong to one.

Minimum deposits and ongoing fees

Most banks have no minimum deposit requirement to open a savings account, though some require $25 or $100. Online banks are more likely to have no minimum. Once the account is open, you can usually deposit as little as $1 at a time, though some banks set a minimum for transfers (for example, $10 per transfer).

Fees vary widely. Many banks charge no monthly maintenance fee on savings accounts, but some charge $5 to $15 per month if your balance falls below a certain amount (often $500 or $1,000). Some banks waive the fee if you set up direct deposit or maintain a linked checking account. Online banks almost never charge monthly fees. Before you open an account, check the fee schedule on the bank's website or ask a representative directly—this information should be free and easy to find.

Interest rates on savings accounts are currently low across the industry, but they vary. As of early 2024, rates range from nearly 0% at some large banks to around 4% to 5% at online banks and credit unions. The difference between 0.01% and 4.5% is significant over time: on a $5,000 deposit over 10 years, you'd earn roughly $2 at 0.01% versus $2,500 at 4.5%. Comparing rates before you open takes 10 minutes and can make a real difference.

How to fund the account and set up ongoing deposits

You can fund the account with a check, a wire transfer, or an ACH transfer (an electronic transfer from your existing bank account). If you open the account in person at a branch, you can often hand over cash or a check on the spot. If you open online, you'll link your existing bank account and transfer money electronically, which usually takes one to three business days.

To set up ongoing deposits—for example, $50 per month for your grandchild's birthday—you can arrange an automatic transfer from your bank account to the savings account. This is called a recurring transfer or standing order. You set it up once, and the bank moves the money on the same day each month. This is free at most banks and ensures you don't forget to deposit money.

Some grandparents also set up a separate checking account and have family members deposit money into it, then transfer the balance to the savings account periodically. This works if other relatives want to contribute—for example, if aunts and uncles want to add to the account for birthdays or holidays.

Tax considerations for custodial accounts and 529 plans

If you open a regular savings account in your own name, there are no special tax considerations. You report the interest earned on your tax return, and you pay tax on it at your normal rate.

If you open a custodial account, the interest earned belongs to your grandchild and should be reported on their tax return (or yours, if they don't file). The first $1,250 of unearned income (interest, dividends, etc.) is usually tax-free for a dependent child in 2024, though this amount changes yearly. Income above that is taxed at your grandchild's rate, which is typically lower than yours. You don't need to do anything special—the bank will send you a 1099-INT form showing the interest earned, and you'll report it when you file taxes.

For a 529 plan, the earnings grow tax-free as long as the money is used for education. When you withdraw money for education expenses, you don't owe federal tax on the earnings. If you withdraw money for non-education purposes, you owe tax on the earnings plus a 10% penalty, but not on the contributions themselves (the money you put in). Some states also offer a state income tax deduction for 529 contributions, which can reduce your state taxes in the year you contribute.

What happens to the account as your grandchild grows

If you opened a regular savings account in your own name, you can transfer it to your grandchild whenever you choose—when they turn 18, when they graduate high school, or whenever you think they're ready. You can also keep it in your name and simply give them access to it, or leave it to them in your will. The choice is yours.

If you opened a custodial account, it automatically transfers to your grandchild at the age of majority in your state (usually 18 or 21). At that point, they own the account and can do whatever they want with it—withdraw it all, keep it invested, or use it for college. You lose legal control at that moment, though you can discuss your hopes for the money with them beforehand.

If you opened a 529 plan, your grandchild can use the money for college, trade school, or other education expenses. If they don't go to college, you can transfer the account to a sibling or cousin without penalty, or withdraw it and pay taxes and a penalty on the earnings. Recent changes to 529 rules also allow you to roll unused 529 funds into a Roth IRA in your grandchild's name, subject to certain limits.

Frequently Asked Questions

Do I need my grandchild's permission to open a savings account for them?

No. You can open a regular savings account in your own name without asking anyone. For a custodial account or 529 plan, you need your grandchild's Social Security number, but you don't need their permission—you're the adult making the decision. However, it's a good idea to tell the parents (your child) what you're doing, especially if you're opening a custodial account, since they may want to coordinate with other relatives who are also saving for the grandchild.

Can I change my mind and take the money back from a custodial account?

No. Once you deposit money into a custodial account, it legally belongs to your grandchild. You cannot withdraw it or use it for yourself. If you want the flexibility to change your mind, open a regular savings account in your own name instead.

What's the difference between a UGMA and UTMA account?

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) are both custodial accounts, and they work almost identically. UTMA is slightly newer and available in all 50 states, while UGMA is not available in South Carolina. For most purposes, they're interchangeable. Ask your bank which one they offer—it won't make a meaningful difference to you or your grandchild.

Can I open a 529 plan if my grandchild is already a teenager?

Yes, you can open a 529 at any age. However, the longer the money sits in the account, the more time it has to grow tax-free. If your grandchild is 17 and starting college next year, a 529 has less advantage than if they're 5. But if they're planning to go to graduate school or trade school later, a 529 can still be useful.

What happens to the account if I pass away?

If you opened a regular savings account in your own name, it becomes part of your estate. Your will or the laws of your state determine who inherits it. If you opened a custodial account, it belongs to your grandchild, so it passes to them automatically—it doesn't go through your estate. If you opened a 529 plan, you can name a successor owner (usually the other parent or another relative) to take over managing the account if you die.