High interest savings accounts for kids and youth

How does a savings account work for my child?

Children’s savings accounts sometimes have higher interest rates than adult savings accounts to encourage kids to build up their savings when they’re young. These higher interest rates usually revert to a standard interest rate once the child turns 18.

Some children's savings accounts have conditions that need to be met to earn the maximum rate, such as depositing a certain amount each month and not making any withdrawals to earn the bonus interest rate.

To be eligible for a children’s savings account, applicants are typically required to be under the age of 18, although age restrictions vary from bank-to-bank. In some cases, parents can open a youth savings account on their child’s behalf.

What are the benefits of opening a savings account for my child?

Opening up savings account for your child has many benefits which include:

Earning interest

By storing your child’s money in a high interest savings account, rather than the humble piggy bank, your child can actually earn interest on their money. Depending on the savings account you choose and how much you regularly deposit, your child could earn hundreds of dollars in interest every year. This has the potential to grow their savings balance beyond what you give them, rather than that money sitting in a piggy bank not earning any interest.

Their money is secure

If you store your child’s money in a piggy bank at home, there’s always the risk that their money could get stolen by an intruder (or their sticky fingered sibling!). By storing their money in a bank account, you have the peace of mind knowing their money, up to $250,000 under the Australian bank deposit guarantee scheme, will be safe.

Financial literacy

Bank accounts can be excellent teaching tools for children to learn good financial habits such as building up their savings. A savings account can also teach your child about the economy and how real world events (such as cash rate changes by the Reserve Bank) can impact their savings account interest rate. It could be an opportunity to introduce older or more precocious children to the concept of inflation, and how a $5 note today is generally not worth quite as much in a year's time.

Read more: Teaching your kids about money

Reach savings goals

If your child has a savings goal like affording a new bike or a Bluey plush toy, a high-interest savings account can help your child reach this goal quicker. Over a year, your child could potentially have earned hundreds of dollars just in interest to put toward their savings goal.

What’s the best bank account for kids?

There are many different savings account products out there aimed at younger Australians. Here’s what to look out for when seeking the right one for you and your offspring, besides simply finding the highest possible rate.

Conditions for maximum rate

Many youth savings accounts have certain conditions that need to be fulfilled to earn the maximum interest rate each month. These might include depositing a certain amount each month, not making any withdrawals, or growing the balance. In the above table, the base interest rate is the rate that will apply to the balance regardless of whether you meet the conditions or not. If the max interest rate is higher, that means there is a bonus rate available that generally is conditional.

Minimal fees

Children’s bank accounts usually don’t have many ongoing fees but you should still look out for any monthly account keeping fees, withdrawal fees, overdraw fees, transaction fees, ATM access fees and so on.

Low minimum opening deposit

Children’s bank accounts generally shouldn’t have a high minimum opening balance considering the account belongs to a child - and most children aren’t swimming in money.

According to Savings.com.au research, a small number of children’s savings accounts require a minimum opening deposit of between $1-$5, while the majority have no minimum opening deposit. Instead, some banks make up for this by having a minimum monthly deposit requirement for earning the maximum interest rate.

High maximum amount

Another thing to keep an eye out for when comparing children’s savings accounts is the maximum amount of money that can be kept in the account. For example, some children’s savings accounts limit the max interest rate to balances under $5,000, while others have much higher maximum amounts (the bonus rate on the CommBank Youthsaver applies on balances up to $50,000).

Depending on how much money your child wants to save, it may be better to look for a savings account with a higher maximum amount.

Educational resources

Some banks provide free resources to teach children good money habits such as how to budget and save through online activities, videos, games and banking apps. These resources can make learning about money fun for children and give them the tools to make smart financial decisions as they grow up.

See also: Should financial literacy be taught in schools?

What are the advantages and disadvantages of a children’s savings account?

Advantages

• Some children’s savings accounts earn more interest than adult savings accounts. Depending on the account, the child may have to meet certain criteria such as not making any withdrawals to earn the bonus interest rate.

• Children’s savings accounts generally don’t have ongoing fees.

• They can help teach your child how to save money and budget from an early age, especially if your bank provides free educational resources.

• If you’re so inclined, you can even open up a bank account for your baby to start saving money as early as possible and take advantage of that compounding interest.

Disadvantages

• Children’s savings accounts have age limits. The age limit differs from bank to bank, and can start from the age of 12, however most have an age limit of 18. When your child reaches this age, they will no longer be eligible for the account and the account will be automatically converted to a regular savings account.

• There are tax implications. If your child is under the age of 16 and earns between $120 and $420 in interest from their savings account and they don’t provide either their tax file number or date of birth, the bank will withhold pay as you go (PAYG) tax at 47% and the child will need to lodge a tax return if they want a refund - obviously this is something a parent will need to do for the child.

• Some children's savings accounts have low balance caps, meaning the top interest rate can only be earned on balances up to a certain amount.

Are there any traps to look out for?

Tax implications

If your child’s savings account is earning interest, the Australian Taxation Office (ATO) has strict guidelines.

If the parent provides the money for their child’s savings account and uses it as they wish (such as spending the money on piano lessons for their kid), any interest earned is considered to belong to the parent and the parent must declare that interest in their tax return.

But if the child is depositing their own money into the account, such as pocket money, Christmas or birthday money, or income they have earned from casual jobs, any interest earned is considered to belong to the child so long as the money isn’t spent by anyone else. If the child earns less than $120 in interest for the financial year, no tax will be withheld and they won’t have to file a tax return.

However, if the child is under the age of 16 and earns more than $120 in interest for the financial year, they will have to provide either their date of birth or Tax File Number (TFN) to avoid being hit with a pay as you go (PAYG) tax of 47% on that amount. The child will need to lodge a tax return if they want a refund of this money. If they earn over $420, they must provide a TFN to avoid this tax - a date of birth alone will not suffice.

The high interest rate is tempting, but it’s not for Mum or Dad!

It may be tempting to put your savings in your child’s savings account to take advantage of the high interest rate that you can’t get on your own account, but don’t. The ATO has very strict tax guidelines in place to govern the funds being held in kids accounts to prevent parents from sneakily hiding their own savings in there.

Parents can take advantage of high interest savings accounts or term deposits for themselves to benefit their own saving goals. 

Always read the T's and C's

Before taking out any financial product, be sure to read the terms and conditions. An interest rate may look really high, but are there any conditions that need to be met in order to earn the maximum interest rate? Do balance caps apply? You should also check what the interest rate reverts to once your child turns a specific age. What looks like a really competitive rate right now may not be so great later on.

Savings.com.au’s two cents

If you want to provide your child with a sufficient financial head start, opening a high interest savings account for them could be a wise move.

The key takeaway here is to look for a savings account with the highest interest rate you can find, but you should also remember that there may be certain conditions that need to be met each month in order to earn the maximum interest rate.

By opening up a high interest savings account for your child and making regular deposits, you’re giving them a great financial start thanks to the power of compounding interest. Not only are you giving them a financial leg-up in life, you’ll also be teaching them valuable money lessons and giving them the tools to become financially literate adults.