Can a Minor Buy a Certificate of Deposit?

Children can use piggy banks to save their money, but the law puts certificates of deposit off limits.
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A certificate of deposit locks your money in a safe place, protected by federal deposit insurance and growing by a fixed rate of interest. You can buy a CD on behalf of a minor, and many banks offer custodial savings accounts over which a parent or guardian keeps control. But state laws that bar minors from entering into legally binding contracts prevent a child from owning a CD outright.

Age of Majority and Contracts

State laws hold that minors may not enter into legally binding contracts. There are some exceptions; the state of Florida, for example, allows contracts for educational purposes. This is why children can't buy their own health insurance, sign leases, rent cars or get credit cards. A child can open a savings account at a bank, with some limitations, but a certificate of deposit would be off limits, as a CD is a contractual arrangement between the issuer and the buyer.

Custodial Transfers and Trusts

By the Uniform Gift to Minors Act and the Uniform Transfer to Minors Act, a parent or guardian can act as a financial custodian for a minor, and transfer securities and savings instruments to the minor's name. Banks will allow parents or guardians to set up a UGMA/UTMA trust account and transfer assets, including cash and CDs, into the account. This is a popular way to save for future college tuition and other educational expenses, and keep the money safe until the minor reaches adulthood. The transfer is irrevocable; the assets can be used for any reasonable expense for the minor, and the trust stays under the control of an appointed trust custodian until the termination date. This arrangement saves the expense and complexity of an ordinary trust, which requires the services of an attorney or financial consultant.

Tax Considerations

Taxes play a role in any consideration of a child's investment and savings. If you are custodian for a minor child's assets, the child is considered by the IRS to be the legal owner of those assets for tax purposes. Children under the age of 18 enjoy a tax exemption on the first $950 of "unearned income" from CDs, dividend-paying stocks and capital gains; the next $950 is taxed at whatever the child's own tax rate would be. The IRS requires a return only if the child had over $950 in unearned income; the parent must prepare the return for a minor dependent, but the minor must sign the return if he's over 14 years of age.

College Financial Aid

If you have set up a custodial IRA for your child, the account may include certificates of deposit. This is another popular method to save for college, as the investments (including CDs) in the account are not considered assets in the calculation of financial aid eligibility. Applicants and parents don't have to report regular or Roth IRAs, or any other qualified retirement or savings plan, on the standard Free Application for Federal Student Aid. If a parent or child took a distribution from the account, however, that would be reportable on the FAFSA.

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