Opening a bank account for your newborn can be a good idea. It can open a pathway to a university education, garner bonus interest and instil the concept of saving in their lives.
It pays to shop around as not all baby accounts are all created equal.
What is a baby bank account?
Some banks and credit unions provide accounts specially for young children. As a parent, you can open an account of this nature in your baby’s name. These accounts are often free of charge, although they may require you (or your baby) to make regular deposits or place restrictions on withdrawals.
Opening a baby bank account
Of course, babies can’t sign the documents needed to open a baby bank account. So parents need to open the baby bank account for their child, and will need to have their name connected to the account. This is in force as financial institutions need assurance about the baby’s responsibility towards the account. When the child turns 18, the parent’s name can then be removed.
You will need your child’s birth certificate to open a baby bank account. Parents will also need be able to verify their identity through a valid identification document like a driver’s licence or passport.
For starters, you can always check with your existing bank if it offers baby bank accounts. If you have access to internet banking you may be able to apply online. Visiting a branch is also a simple way to apply for a baby bank account.
Tax implications of baby bank accounts
The Australian Tax Office (ATO) has legislation in place to stop parents gaming the tax system by hiding their money in baby bank accounts.
If you are the provider in your child’s account and you are spending the money when you feel like it, you will be required to declare the interest earned in your income tax return.
If the money in the account genuinely belongs to your child, these rules apply:
- If your child’s account earns less than $120 interest per year, no tax applies.
- If your child is under 16 and earns between $120 and $420 in interest per year, and if that child provides their date of birth or tax file number (TFN), then the bank won’t withhold tax and the child won’t have to lodge a tax return. If the date of birth or TFN is not declared, then tax will be withheld at the top rate and the child will need to lodge a tax return to gain a refund.
- If your child is under 16 and earns $420 or more in interest per year, and if they declare their TFN, the bank will not withhold tax. If no TFN is provided, tax will be held at the top rate and your child will need to provide a tax return to get a refund.
- If your child is 16 or 17, earns $120 or more in interest per year and provides their TFN, the bank will not withhold tax. If no TFN is provided, tax will be withheld at the top rate and your child will need to lodge a tax return to receive a refund.
The benefits of baby bank accounts for children
One advantage of baby bank accounts is that they can be a good way to teach children about saving and budgeting.
Learning to budget is not just about teaching kids to put some money away; it also teaches them about spending needs and saving goals.
A baby bank account can also help your child understand more about the economy. An interest-bearing account will educate your children about interest rates, inflation, the economy and even the impact of the wider world economy.
Finally, baby bank accounts can educate children about how linked accounts work. If the baby bank account is linked to your own transaction account, your child will gain an insight into making transfers between accounts.
Traps to avoid with baby bank accounts
Money in a baby bank account is covered by the Australian government’s Financial Claims Scheme, which guarantees deposits of up to $250,000.
However, one trap to be aware of is that tax implications could apply if you decide to save your own money in your child’s baby bank account – even if you’re using that money to buy things for your child.
Baby bank accounts are specially designed for children only, so parents must resist the temptation to hide their own savings in their child’s account. The ATO has strict rules regarding funds held in baby bank accounts.
Another thing to remember is that baby bank accounts often place a limit on the number of withdrawals you can make. As your child gets older, they may fall in the trap of making more withdrawals than allowed.
Finally, don’t forget that the interest rate that compels you to choose one baby bank account over another might be a short-term introductory rate, which then reverts to a lower standard rate.