A minor cannot buy a certificate of deposit (CD) unless a custodian of legal age is involved in setting up the account. CDs for minors are governed by the Uniform Transfers to Minors Act; one reason this act was made into law was so children could own securities. Under this law, an adult can open the CD in the child's name and handle any transactions related to it until the minor turns 18 or 21, depending upon the laws of the state where the CD was issued.
Custodians have the authority to enact any transactions made in regard to the minor's CD. These include withdrawing funds when the CD matures and spending the money on the child's behalf, adding more money to the CD when it matures or rolling the CD over into a shorter or longer term of investment.
Although the IRS has rules regarding what funds you can deposit into accounts like Roth IRAs, this does not hold true for a CD. This means that a child who is 8 years old and doesn't have a job (that is, taxable income) can have the custodian put the money he saved from household chores in the CD when the custodian rolls it over for another term. This helps the boy learn the value of saving and start to form regular saving habits.
Because minors (with rare exceptions) make less than their parents, a 16-year-old who works part-time pays fewer taxes on interest her CD earns. But the parents will also get a tax break if they open CDs in her name to stash their funds: The first $850 of accumulated interest, capitol gains tax or dividends isn't subject to federal tax when a minor is younger than 18 when the tax year ends. The next $850 will be taxed in the child's tax bracket. Unearned income exceeding $1,700 will be taxed at the parents' rate (unless the child earned more than her parents).
Ownership of Assets
Although the CD's custodian manages the account, the minor child is still the owner. This means that when he reaches the age of majority, he is considered an adult who can do whatever he wants with the funds. Many relatives put money into CDs to help children pay for such milestone events as college tuition, their first home or their first car, but that doesn't mean he is bound by law to spend it on these items.
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