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How to maximize your child tax credit payment for your kid's future

Receiving the child tax credit? Put it to good use by opening these savings accounts for your kid.

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As of July 15, families of nearly 60 million eligible children are starting to receive the first payment of the newly expanded child tax credit, according to the U.S. Treasury Department and IRS.

The increased child tax credit, which was part of the American Rescue Plan that passed back in March, gives eligible families $3,600 for each child under age 6 and $3,000 for each child ages 6 to 17 — both amounts are an increase from $2,000 per child in 2020, plus the child tax credit revisions extended to include 17-year-olds. In this first round of six monthly payments, parents with children who qualify can expect an average payment of $423.

A windfall of $423 can undoubtedly provide some relief for low- and middle-income parents who may still be recovering from the pandemic's impact to their finances. The funds can help cover their children's expenses, like routine doctor visits and school supplies. For parents who don't have an immediate or essential use for the extra cash, however, consider using it to get a jump-start on your kid's savings.

Anand Talwar, deposits and consumer strategy executive for Ally Bank, suggests depositing the child tax credit payments into no-fee savings accounts that offer higher-than-average interest rates. He notes that these types of savings accounts are great options that work for almost anyone.

"Determining what to do with child tax credit payments can be stressful for parents," Talwar says. "[A no-fee, high-yield savings account] puts the money to work and still gives parents peace of mind because the funds are accessible if needed."

Consider these savings options for your child

Minors, or those typically under age 18, usually can't open a savings account in their own name. Parents, however, can open custodial or joint accounts where they manage the funds until their child reaches legal age (typically 18 to 21 years old). With the national average APY on savings accounts currently at 0.06%, according to the Federal Deposit Insurance Corporation (FDIC), we found a few accounts that offer your kid's savings above-average rates.

In addition to these financial accounts, many parents can turn to savings and investment accounts called 529 plans to put away money for their kid's higher education while also getting tax benefits. With a 529 plan, your contributions grow tax free and withdrawals made later on for qualified education expenses (things like tuition and books) are also non-taxable. 529s are state-sponsored plans, but you aren't limited to the state you live in.

Below, Select rounds up a handful of savings options — plus one investing choice — for putting your child tax credit payments to good use for your kid. These types of vehicles can jumpstart your kid's financial journey, while also instilling some good money habits early on.

Capital One Kids Savings Account

The Capital One Kids Savings Account offers dual access for both children and their parents. Kids can sign in, make deposits and check their balance online 24/7. The parent on the account makes the transfers, sets up an Automatic Savings Plan (with regularly scheduled allowance deposits) and manages the account details. There is a 0.30% APY, no fees or minimums.

Alliant Credit Union Kids Savings Account

The Alliant Credit Union Kids Savings Account offers joint ownership for parents, grandparents or guardians (joint owner must be an Alliant member). Parents can transfer their child's allowance directly into their account, track progress toward savings goals and help their kid deposit birthday or holiday checks through the mobile banking app. There is a 0.55% APY with an average daily balance of $100 or more and no monthly fee for members who elect to receive eStatements.

BECU Early Savers Account

The BECU Early Savers Account is another credit union savings account that offers joint ownership for parents or guardians (joint owner must be approved for BECU membership). Adults oversee the account and can provide a digital allowance. There is a high 2.02% APY on the first $500 deposited, plus no monthly service fees or minimum balance to open.

Ally Online Savings Account

Ally Bank doesn't allow minors to be joint account owners, but they do offer custodial account options. The Ally Online Savings Account is a good choice as it offers tools to engage children, like its "bucket" feature. Parents and children together can create multiple buckets of different things they want to save up for. "This opens up conversations on how to save for what matters most, and needs versus wants," Talwar adds. "Most importantly, it makes saving personal and fun for families." There is a 0.50% APY with no minimum balances required. Read Select's review on the Ally Online Savings Account to find out more.

my529 (Utah)

The my529 (Utah) offers both age-based and do-it-yourself investment options when setting aside savings for your kid's college education. The age-based portfolios automatically rebalance to ensure the right asset allocation, moving toward more conservative investments by the time your child is ready to head off to college. Otherwise, account holders can customize their portfolio as they wish. Fees are reasonable, with management fees up to 0.15% and expense ratios up to 0.33%.

Fidelity® Youth Account

The Fidelity Youth Account is a brokerage account recently launched by Fidelity Investments for teens 13 to 17. Young users can buy and sell most U.S. stocks, ETFs and Fidelity mutual funds on their own with parental oversight. There are no account fees, zero commissions for online trading, and teens aren't tied to any minimum investment requirements. Learn more on how your teen can get started investing with this new account.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.