Ok, we're both wrong. And I have to apologize to the bank! This actually looks pretty good.

We can't assume total initial investment as cost, because you don't really have to let the total balance sit there.

We would have to reduce compounding, because the reward's "interest rate" would be different if properly compounded, quarterly, as an alternative investment would be.

So I went about this the other way: I figured out the alternative.

Opening options:

A:

**$500 to open before age 12 but after age 6:**: 50/month deposits (final result $5100, from 50*12*6+500+1000), close at age 18

B:

**$25/month to open before age 6**: No other opening deposit (final result $4600, from 25*12*12+1000), close at age 18

What you would need to replicate results of these options:

Option A:

$500 initial deposit

50/monthly deposit

6 year duration

6.3886 interest compounded quarterly (not the best stock run, but pretty damned good for guaranteed!)

Option B:

$25 initial deposit

$25/monthly

12 year duration

3.8405 interest compounded quarterly (not a good stock run, but good enough that it beats many bonds and any modern CD!)

http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx(these numbers assume starting the account at the latest possible moment, and never missing a payment. The bank's disclosures allow you to miss one payment a year, and actually, doing so will increase your effective interest rate, because it doesn't change the payout other than from the account's regular 0.05% interest. The bank is obviously betting more than half their customers will miss more than one payment in one of the years and/or not calculate and execute the optimal plan)

Final calculation: 6.3886 interest and 3.8405 interest need to be multiplied by the inverse of your tax bracket, because these do not appear to have tax advantages. IF you start saving at the moment the account is the most advantageous to you, use the first option, and have a 25% tax bracket, you're still getting 4.79% interest over a 6-year term, which is still pretty good and completely ignores stock volatility. If you could have a rough patch and fail to make deposits, or haven't taken advantage of tax-advantaged accounts already, this account is a bad bet. If you have the means to save elsewhere, this account, timed properly, is a fine boost to your savings plan at the 6-year horizon. The 12-year option is not ideal, but is better than any CD currently available, and competitive with many bonds, at the 25% tax bracket. Doing either option earlier than absolutely necessary further reduces returns against a potential alternative vehicle with the properties and results listed. Because my fantasy "alternative vehicle" has no listed expense ratio, assume your results using the bank have interest "results" higher than the ones I gave by the amount of your expense ratio on, presumably, a low-cost index fund.

If you're in a lower tax bracket, say 10%, multiply 6.3886*0.9 = 5.75% - not bad at a 6-year window!