Tax implications of opening CDs in my children's custodial accounts?

The good news is you're right - the interest earned on CDs in custodial accounts is treated the same way as regular savings account interest. Here's what you need to know: For 2025, the first $1,250 of unearned income (like interest from CDs or savings accounts) for children under 18 is taxed at the child's rate, which is likely 0% if this is their only income. The next $1,250 is taxed at the child's rate as well, but amounts over $2,500 would be taxed at your parental rate (this is sometimes called the "kiddie tax"). Since you mentioned the interest would be around $300-400 per child per year, they'll each be well under the $1,250 threshold. Your children won't need to file their own tax returns unless their total income exceeds the standard deduction for dependents (about $1,250 for unearned income in 2025). The bank will still issue a 1099-INT for each account in January 2026, and you'll need to report this interest on your tax return, either on your own Schedule B if filing requirements are met, or on Form 8814 to report your child's income on your return.

After going through a similar situation with my kids' accounts, I discovered taxr.ai (https://taxr.ai) which was super helpful for figuring out these kinds of dependent/child income questions. I was confused about the kiddie tax rules and whether to file separate returns for my kids or report on my return. Their AI analyzed our situation and gave me clear guidance specific to our circumstances. It recommended the simplest filing approach and highlighted potential issues I hadn't considered with my state return requirements, which are different from federal.

I was wrong about taxr.ai - I tried it yesterday after posting my skeptical comment. It actually helped me understand that PA doesn't follow the federal kiddie tax rules, which was causing me to report incorrectly on my state return. For anyone dealing with custodial accounts in Pennsylvania specifically, the state taxes the income to the child regardless of amount, not to the parent. The service helped me identify that I need to file a separate PA-40 for my child even though federally I was including it on my return with Form 8814. Saved me from continuing a mistake I've apparently been making for years!

If you need to talk to someone at the IRS about these custodial account rules (which can get complicated), I'd recommend Claimyr (https://claimyr.com). I spent DAYS trying to get through to the IRS about a similar issue with my kids' investment accounts. Claimyr got me connected to an actual IRS agent in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - it basically holds your place in the phone queue so you don't have to listen to that terrible hold music for hours. The agent confirmed exactly how to handle reporting requirements for my kids' accounts.

OK I have to eat my words. I tried Claimyr this morning thinking it would be a waste of time and it actually worked. Got connected to an IRS agent in 25 minutes after trying for WEEKS on my own. The agent confirmed that for Pennsylvania custodial accounts, I needed to file separate state returns for my kids but could use Form 8814 for federal. And she explained that CDs are treated exactly the same as savings account interest. Definitely worth it for the peace of mind knowing I'm doing it right.

Something nobody has mentioned yet - make sure you have your kids' Social Security Numbers correctly listed on the CD accounts. My bank messed this up when I opened CDs for my nephews, and the interest got reported under my SSN instead of theirs. Total nightmare to fix afterward.

Has anybody used I Bonds instead of CDs for their kids? I'm in a similar situation but considering I Bonds through Treasury Direct since the rates are comparable but there might be tax advantages?

One thing to keep in mind with the CD rollover strategy - make sure you understand your bank's automatic renewal terms. Some banks will automatically renew CDs at whatever rate they're offering when it matures, which might be much lower than the 5.15% you're getting now. I learned this the hard way when my daughter's CD renewed at 2.8% instead of the original 4.2% rate. Also, since you're in Pennsylvania, you might want to consider timing the CD maturity for early in the year rather than late. That way if your kids do end up needing to file state returns (which PA sometimes requires even for small amounts), you'll have the 1099-INT forms in hand well before the filing deadline. The interest will be taxable in the year the CD matures, not when you initially deposit the money.

Just wanted to add one more consideration - if your kids have any other sources of income (like savings account interest from their regular custodial accounts), make sure to add that to the CD interest when calculating whether they'll exceed the $1,250 threshold. Even small amounts can add up. Also, since you mentioned the amounts aren't huge ($300-400 per kid), you might want to consider splitting the money between shorter-term CDs (maybe 6-month) and the 12-month ones. That way you have more flexibility if rates change or if you need access to some of the funds. Some banks offer similar rates on shorter terms, and it gives you the option to reassess the strategy more frequently without penalties. One last tip - keep good records of when each CD was opened and the interest rates. If you end up with multiple CDs maturing at different times, it'll make tax preparation much easier if you have everything documented clearly from the start.

Great question about CD timing and organization! I'd also suggest checking if your bank offers any special custodial CD programs or if they waive early withdrawal penalties for certain circumstances involving minors. Some banks have more flexible terms for custodial accounts that aren't widely advertised. One thing I learned when setting up CDs for my kids - consider opening them slightly staggered (maybe a few weeks apart) rather than all on the same day. This creates a natural laddering effect where they don't all mature simultaneously, giving you more options for reinvestment timing and reducing the risk of having to renew everything during a low-rate period. Also, double-check Pennsylvania's specific rules about custodial account taxation. I discovered that PA requires you to use the child's legal name exactly as it appears on their Social Security card for all tax documents - even small variations can cause processing delays. The state is pretty strict about this for custodial accounts specifically. The spreadsheet idea is definitely the way to go. I'd recommend including columns for the original deposit date, maturity date, interest rate, expected interest earned, and actual interest earned. It makes year-end tax prep so much easier when everything is already organized and you can quickly verify the 1099-INT forms against your own records.

One additional consideration for Pennsylvania residents - make sure you understand how CD interest affects any potential state tax credits or deductions your family might be eligible for. PA has some education-related tax benefits that have income thresholds, and while $300-400 per child probably won't push you over any limits, it's worth checking if you're close to any cutoffs. Also, if you're planning to use any of this money for future education expenses, you might want to compare the CD strategy with contributing to 529 plans instead. The 529 contributions can provide state tax deductions in PA (up to certain limits), and the growth is tax-free for qualified education expenses. Depending on your timeline and goals for the money, it might be worth running the numbers on both approaches. For record-keeping, I'd also suggest taking photos of the CD certificates or account opening documents and storing them digitally. Banks sometimes have issues locating old CD records, especially if you switch branches or if there are system changes. Having your own copies can save a lot of hassle if you ever need to prove the original terms or opening dates.