Term deposit accounts will allow your children to earn a steady, fixed rate of interest for up to five years at a time.
Salena Kulkarni, a mother of two and a chartered accountant, believes opening a term deposit for children helps spark early conversations about financial responsibility and the value of saving.
“I was conscious about wanting to help shape healthy views on money, so we created a rhythm early on, setting aside money consistently for their future,” she told InfoChoice.
“It became a great foundation for our family’s spending rules. No matter how much they received or earned, they knew it was important to save first, and then they could spend the rest freely and without guilt.”
Opening a kid's savings account also teaches your children an important life lesson: How to save money and how compound interest works. You might already have a savings account for your child, but a term deposit could be worth comparing, too, and could be a useful additional to your savings arsenal.
Looking for a good term deposit for your children
A useful place to start is with the bank you use for most of your accounts and services, but it shouldn't be the only place you look as you never know what's out there. It’s useful to compare not only the interest rate, but the term lengths, how the interest is paid, minimum and maximum deposits, and rollover options.
Are there any special rules for term deposits for children?
When it comes to a child's term deposit, banks have different rules and criteria. Some have a minimum age of 12, some 15 ,and others even offer you a baby savings account for serious forward-planning. However, there’s nothing stopping you from opening a term deposit for your child, in your name, but the tax rules might be different (more on that later).
What are the benefits of term deposit accounts for children?
Why not just open a regular savings account and use that for the foreseeable future? Because there are particular advantages to using term deposits, no matter the age of the account holder.
Easy to understand
Term deposits are a simple and straightforward way to start saving and investing. They allow you (or your child) to invest their money at a set, fixed interest rate, so you know exactly how much their money will have grown by the end of the term. Term deposits are simple interest, not compounding like with savings accounts, so your child can easier calculate how much they stand to gain.
The interest rates can't dip (admittedly, they can't rise either, but sometimes you just want that certainty), so you can plan ahead for things like that first car or a gap year.
“I’m a huge believer in keeping things simple, especially early on. A term deposit was a great first step. As their confidence and understanding grew, we knew they would get interested in other investments,” Ms Kulkarni said.
Your child can't get to their money easily
Once children get to a certain age, they'll be tempted to chip away at their savings for a new phone, or a clothes-buying spree, so having the funds locked away helps to prevent this.
Most term deposits don't charge any management fees, however if you make an early withdrawal you'll probably be penalised by forgoing some of the interest payable, but this can also serve as a valuable learning experience.
Your child will learn about saving up
Term deposits often have steady interest payments - often with the choice of monthly right up to at-maturity payments. You could invest a lump sum and see interest paid monthly or quarterly, which could serve as pocket money for your child.
Or - you could choose an annual or at-maturity payment which could serve as a lesson in patience, with interest payments potentially serving as a tidy birthday or Christmas present.
Ms Kulkarni, who also has a background in wealth coaching and private investing, sees this as a powerful teaching opportunity.
“We wanted to teach stewardship and instill strong money habits early. It gave us a natural way to start conversations about living within your means. Practically, the goal has always been to support their future, especially when the time comes to buy their first home,” she said.
“Be intentional about how you do it. Setting up an account is great, but the real value comes from using it as a tool to teach. Start early. Get your kids involved. Help them contribute.”
“I’ve seen too many situations where parents skip the education part, only to watch the money vanish once handed over. Teaching stewardship is the real gift.”
They also learn to be patient
Whether they plan to save enough to buy driving lessons or to pay down a chunk of their HECS/HELP debt, sitting patiently until their balance reaches maturity teaches your child how to defer gratification and restrain their impulses.
“Before they can access those funds, they’ll need to show they’ve contributed themselves. It’s not a handout, it’s a hand-up,” Ms Kulkarni said.
You get security
If you use an authorised deposit-taking institution for your term deposit the Australian Government Guarantee Scheme covers you for up to $250,000, so there's very little risk of your child losing the money. They also offer a steady, fixed rate of interest.
The downsides of term deposits for your kids
The main downside of term deposits - no matter the account holder’s age - is the lack of flexibility.
Can’t grow savings
Once you’ve invested, you can’t add to your savings, which can often be a motivator for younger kids to see their honeypot grow. You can of course open another term deposit account, but this has another set of considerations.
Can’t withdraw early
A year - or even six months - let alone five years is a long time for a kid. One of the main motivators of kids saving money is being able to withdraw it to buy the stuff they like. Whether that’s a bike or a PlayStation, or a car, your child won’t be able to withdraw money for those milestones. Withdrawing early can mean penalties and a sacrifice of interest - it may not even be possible unless you can prove financial hardship.
No compounding interest
Compounding interest means your interest earns interest - this is a common feature on savings accounts but not so with term deposits, unless you re-invest the interest on maturity or into another investment opportunity. Compounding interest can be a useful lesson and motivator for your child.
High minimum deposits
Many term deposit accounts carry minimum deposits of at least $1,000, sometimes even $5,000 or $25,000. This can be an insurmountable hurdle for a kid, and to reach those goals they may need a kids' savings account anyway. This is unless you help them with their deposit, which likely has tax implications for you.
Tax implications of term deposits for your kids
When opening a term deposit in their child’s name, parents should be aware of who is responsible for declaring the interest earned. Term deposits often require a high minimum balance, and parents are more likely to be taxed on the interest at their usual income tax rate. This is because the ATO might not consider this to be a kid’s genuine savings.
The key rule: who provides and controls the money determines who pays the tax. If a parent funds and manages the account - even if it’s in the child’s name - the interest must be declared in the parent’s tax return. If the money genuinely belongs to the child - for example, if they are old enough to have a job - and they have control over it, the interest is taxed as the child’s income.
This is where it gets tricky - with high minimum opening balances on term deposits, this presents a high barrier of entry for a child, and the many thousands of dollars might not be genuine savings on the child’s behalf.
Children can also have a Tax File Number (TFN) at any age. Without a TFN or date of birth on file, banks will withhold tax at 47%. To claim a refund, a tax return must be lodged.
Interest thresholds vary by age, with no tax withheld if under 16 and earning less than $120 annually. For higher amounts, TFNs help avoid unnecessary tax deductions.
What to look for when choosing a child's term deposit
You need to spend a little bit of time comparing children's term deposit accounts before deciding which one suits you best. Here's what you need to look at.
The interest rate
This is probably the most important factor to look at, as it determines how much your child's savings will grow. Remember that it'll stay at that rate for the duration, and won’t benefit from RBA interest rate rises - nor will the rate decline.
What's the minimum age requirement?
Each provider has different minimum ages for its various products, with some banks having no minimum and others needing the account holder to be aged 16 or over.
Look at the minimum and maximum deposits
Some accounts have a minimum opening balance, very often $1,000. Others have a maximum deposit, so choose an account that's going to suit the amounts you have available to put into it.
Check the term lengths
The terms can range from one month to five years, but not all banks offer the same term lengths. You should have an idea of how long you want to invest the money for, but you also need to look at the interest rates as longer terms might carry better rates.
How often the interest is calculated?
Ideally you want an account which calculates the interest daily so there's more chance for the interest to compound itself, giving better returns at term.
What happens at maturity?
You usually have a few options for when the term ends. The money could be transferred into an at-call account, or it could simply roll over into a new term deposit. You may be able to choose a new account with a different interest rate then.
Early access arrangements
You need to find out what happens if you make an early withdrawal, as most accounts will impose a fee or a penalty on any interest earned, or even both.
What happens when junior turns 18?
When the account holder turns 18, some term deposit accounts start to levy tax, or they may change the interest rate, It’s important to check the terms early so you’re not caught off guard.
Photo by Kaboompics.com via Pexels
Originally published in May 2019
