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Children's savings accounts
Saving is a great habit to teach children. The sooner they learn about financial discipline and delayed gratification, the sooner they can start building wealth. And the sooner they start building wealth, the easier they’ll find it to take their first steps on the property ladder and save for their retirement.
Another benefit of getting kids involved with saving is that they learn how to manage a bank account. The more they develop their financial literacy, the easier they’ll find it to understand more complicated products and strategies later in life.
With that in mind, a children’s savings account can be a good way for children to learn about money, saving and banking.
Most lenders that offer traditional savings accounts also offer dedicated savings accounts for children. As a general rule, children’s accounts don’t charge ongoing fees, yet they pay relatively high interest rates.
Standard features of children's savings accounts
Children’s accounts generally allow free deposits and withdrawals – but the free withdrawals might not be as free as they sound.
Many children’s accounts will pay a relatively low level of regular interest, as well as a relatively high level of bonus interest for those months in which no withdrawals are made. So free withdrawals can actually prove costly.
Still, there are two benefits to these sorts of products. First, they give children an incentive to increase rather than decrease their savings. Second, they teach a valuable lesson that financial products often come with catches and can be more complicated than they initially seem.
Tax rules for children's savings accounts
Given that children’s savings accounts can only be opened by minors, they must be free of tax obligations, right?
The Australian Taxation Office (ATO) imposes strict rules around children’s savings accounts because it wants to stop parents evading taxes by parking money in their children’s accounts.
Here, in the ATO’s words, are the official rules on children’s savings accounts:
“If your child is less than 16 years old, special rules apply to their income from a savings account. When we work out their age, we treat them as being under 16 years old until the end of the calendar year in which they turn 16.
“If your child is:
- any age and they earn less than $120 per year from savings accounts per year, their financial institution will not withhold tax
- less than 16 years old and earns between $120 and $420 from savings accounts per year and
- provides either their date of birth or a tax file number (TFN), the financial institution will not withhold tax and they don't need to lodge a tax return
- doesn't provide either their date of birth or TFN, the financial institution will withhold pay as you go (PAYG) tax at 49% and they need to lodge a tax return if they want a refund
- less than 16 and earns $420 or more from savings accounts per year and
- provides their TFN, the financial institution will not withhold tax
- doesn't provide their TFN, the financial institution will withhold PAYG tax at 49% and they need to lodge a tax return if they want a refund
- 16 or 17 years old, earns $120 or more from their savings account per year and
- provides their TFN, the financial institution will not withhold tax
- doesn't provide their TFN, the financial institution will withhold PAYG tax at 49% and they need to lodge a tax return if they want a refund.
“If you have a joint account between an adult and a child aged under 16 years, the same rules apply as those for a 16- or 17-year-old.”
Property Personal Finance Writer
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.
Today's top savings accounts products
Can you set up a savings account online?
Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.
Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.
How to open a savings account for my child?
Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.
Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.
Can you have a joint savings account?
Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.
Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.
Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly.
What is the interest rate on savings accounts?
As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria
How to make money with a savings account?
Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.
To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.
Can you set up direct debits from a savings account?
It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.
Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.
How much money should I have in my savings account?
A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.
If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.
Can I overdraft my savings account?
A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.
How does interest work on savings accounts?
The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency.
Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.
How do I open a savings account?
Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process.
You may be required to provide:
- Personal details, including identification (driver’s license, passport etc.)
- Tax file number
- Employment details
Who has the highest interest rates for savings accounts?
What is a savings account?
A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.
What is a good interest rate for a savings account?
A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.
Can you direct deposit to a savings account?
Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.
How can I get a $4000 loan approved?
While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:
- Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
- Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
- Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)