Savings bonds were once a great savings tool for kids. At time of publication, two types of savings bonds are available for purchase from the US Treasury, Series EE and Series I. Both earn interest for up to 30 years, though I bonds have a variable interest rate and EE bonds have a fixed rate for the life of the bond. But, starting with the recession in 2008, the interest rate offered on either I savings bonds or EE savings bonds hasn't been so great. As of 2012, EE savings bonds have a fixed rate of 0.60 percent, while I savings bonds have an interest rate of 0.00 percent.
If paying for college is your goal, look into 529 plans, which are administered by each state. As long as your child uses the money to pay for postsecondary schooling, the earnings in the plan are tax-free. Two types of 529 plan are available: One lets you purchase credits or room and board at a college for the future, and the other acts like a regular investment or savings account. The owner of the account decides when to distribute the money to the student. Certain investments, such as stock mutual funds or bond mutual funds, carry some risk: If the market has a downturn, the plan can lose money.
A regular savings account with a bank or credit union can be a suitable alternative to a savings bond for your child. Minor children need a custodian -- a parent or guardian -- included on the account. The money belongs to your kid, but he won't be able to get to it until he is either 18 or 21, depending on where you live. Savings accounts earn interest, which fluctuates based on market condition: You aren't locking your child into decades of low interest rates. Some savings accounts require a minimum balance, so review the information carefully before opening one. The money in a savings account is protected from loss by the Federal Deposit Insurance Corporation, so it is guaranteed not to lose value.
As long as your child has earned income for the year, he can put it into an IRA. "Earned income" means money from a proper job, such as a part-time after-school position at the local coffee shop, not money your kid gets from babysitting his cousins or as a gift from you or his grandparents. A Roth IRA is usually the best option for a child, according to Bill Bischoff of "Smart Money." Your child will pay tax on the amount he puts into the Roth IRA, but won't have to pay taxes on the earnings when he takes the money out years later.
Certificate of Deposit
A certificate of deposit, or CD, is the midway option between a savings account and a savings bond. Like a savings bond, the money in a CD must remain there for a set amount of time to earn the full amount of interest. Like a savings account, a CD is usually offered by a bank. Your kid can select a CD that matures in as few as six months or as long as five years. Usually, CDs have higher rates of interest than savings accounts in exchange for the duration of the investment.
- Treasury Direct: Individual I Bond Rates and Terms
- Treasury Direct: Individual EE Bond Rates and Terms
- SEC: An Introduction to 529 Plans
- Saving for College: Name the Top 7 Benefits of 529 Plans
- Bank of America: UTMA Savings Accounts for Children
- Family Education: Savings Accounts for Kids
- Smart Money: IRAs for Kids
- The Mint: Certificates of Deposit
- Treasury Direct: I and EE Bonds Comparision
- Brand X Pictures/Brand X Pictures/Getty Images
- How to Save for College With Pretax Dollars
- Can Grandparents Set Up Roth IRA Accounts for Their Grandchildren Under 18 Years-of-Age?
- Roth IRA vs. 529 for College Savings
- Can You Deduct a Child's College Dorm Room Costs?
- Rules for a Custodial Roth IRA
- What Is an Example of a Low-Risk Asset?
- Long-Term Investment Gifts for a Baby
- How to Transfer 529 Plan Money to Another Child