Are there special savings accounts for children?

Many lenders offer savings accounts that are specially designed for children.

Typical features of children’s savings accounts include:

• Relatively high interest rates
• No ongoing fees
• Free deposits

Of course, interest rates and fees vary from lender to lender, so it pays to shop around.

Pros of children’s savings accounts

Children’s savings accounts are a great device for teaching good habits at an early age.

One lesson that children’s savings accounts teach is the importance of delayed gratification. Children learn that if they have the discipline to invest – rather than spend – whatever they earn from pocket money and part-time jobs, they will be rewarded with ‘free money’, or interest. This is a valuable life lesson.

Children’s savings accounts also teach important lessons about the financial system – how to invest money, what happens to that money and why a company would want access to that money.

Cons of children’s savings accounts

Children’s savings accounts often allow free withdrawals – but with a catch.

Some accounts pay very low levels of ‘regular’ interest, combined with relatively high levels of ‘bonus’ interest if no withdrawals are made in a given month.

So even though withdrawals might be free in theory, they can turn out to be very expensive in practice.

Again, rules vary from lender to lender, so shop around.

Tax rules for children’s savings accounts

The Australian Taxation Office has created strict rules around children’s savings accounts to stop parents parking their money there for tax purposes.

According to the rules:

1. Children who earn less than $120 per year from savings accounts won’t have any tax withheld.

2. Children who are under 16 years and who earn less than $420 per year from savings accounts won’t have any tax withheld – as long as they provide either their date of birth or tax file number. Otherwise, the lender will withhold pay-as-you-go tax at a rate of 49 per cent, and they will need to lodge a tax return to claim a refund.

3. Children who are under 16 years and who earn $420 or more per year from savings accounts won’t have any tax withheld – as long as they provide a tax file number. Otherwise, the lender will withhold pay-as-you-go tax at a rate of 49 per cent, and they will need to lodge a tax return to claim a refund.

4. Children who are 16 or 17 years won’t have any tax withheld if they provide a tax file number. Otherwise, the lender will withhold pay-as-you-go tax at a rate of 49 per cent, and they will need to lodge a tax return to claim a refund.

Children are considered to be under 16 years until the end of the calendar year in which they turn 16.

Click here to get more detail about the tax rules for children’s savings accounts.

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