Even though you'll probably be forking out for your kids well into their twenties, they're never too young to learn how to manage money well. Opening a bank account is a great way to introduce them to the concept of saving. You'll also help them earn a little extra pocket money in the process.

Let's go to school

The Commonwealth Bank's (CBA) School Banking program has been the major player in the area of kids' bank accounts for more than 80 years, with thousands of Australian schools participating in the scheme. CBA's Youthsaver pays less interest than other kids' accounts, but if your child's school participates then letting them join will help them learn to save in an engaging way.

  • Kids learn the ins and outs of banking via a rewards program linked to their account.
  • Points earned are based on the number of deposits, rather than the amount of cash deposited.
  • The program is also a fundraiser for the schools, who receive a commission of $5 per account activated, plus five per cent of any money deposited.

Finding the best account

If you want to shop around for the kids' account that pays the best interest or charges the lowest fees, keep the following advice in mind.

Piggybank interest rates

Kids' accounts generally offer reasonable interest rates, but to get more interest than the low base rate, young savers will need to contribute regularly – usually at least monthly. They'll also need to be disciplined; if any money is withdrawn during the month, the interest rate will usually drop.

Beat the system

Tricky rules give savvy kids an opportunity to use the system to their advantage, and that's a lifelong skill. To manage their money well, they should:

  • divide their savings between a higher-interest savings account and a transaction account
  • make regular monthly deposits into the high-interest account, and no withdrawals
  • keep a smaller amount of money in the transaction account for cash on demand.

Many banks also offer fee-free kids' versions of their normal transaction accounts, but the downside of this type of account is that they usually pay little or no interest.

Watch out for sneaky fees

Banks generally won't charge kids account-keeping fees, but other fees can apply. For example, St George Incentive Saver offers only one free withdrawal per month, then charges $2.50 if your child withdraws money at a branch and 60c for ATM withdrawals.

Banks may also penalise kids for dumping a pile of coins on the counter. While most institutions exempt them from a flat or percentage-based coin-counting fee, some will take a cut.

Once your child hits an age-limit – usually 12 – their account might automatically convert. Make sure the new account is fee-free, and check the interest rate and conditions.

Follow the rules

Managing kids' savings accounts should be simple, but it's important to play by the rules to get the most from their money. Conditions on many accounts can be confusing, so do a little homework before signing them up.

What about my teenager?

Older kids would do well to graduate to an online savings account. Flexible accounts like ANZ's Smarty Pig are available for kids aged 12-plus, while ING's Savings Maximiser is available for kids 13 and up.

You can also open a regular adult account for this age group. Check out our article on high-interest savings accounts for more tips.

Steep tax rates and red tape

Government generosity for young savers is pretty limited. Since 1 July 2011, the low-income tax offset no longer applies to interest earned on kids' accounts. To discourage parents from putting money into accounts under their child's name, taxes apply if they earn more than $416 in interest.

  • Depending on the current interest rate, your child might be hit with tax on an account balance of $7000 or more.
  • Interest between $416 and $1307 is taxed at 66%.
  • If interest amounts to more than $1307, the whole amount is taxed at 45%.
  • Your child will need to lodge a tax return for any interest income over $416.
  • Exemptions apply for children under 18 who work full-time and those with certain disabilities.

Is it their money or yours?

The ATO has strict rules on whether the income belongs to the child or the parent. The cash needs to genuinely belong to your child, not just be spent on them. So save up for school camps and tennis lessons in your own account, not your child's.