How Can I Invest For My Kids?
Investing for your children can not only provide a great financial advantage for your kids when they grow up, but it also introduces them to good money habits and the benefits of delayed gratification.
Whether it’s pocket money from doing chores around the house, birthday money, an inheritance, or you just want to help set them up financially, many parents want to invest for their kids.
However, with so many different options to choose from, it can be difficult to decide which is right for your children, this can often lead to putting this important task into the ‘too hard’ basket.
While it can be difficult, the sooner you start, the better of your children will be in the long run.
Let’s get the boring stuff out of the way. Tax.
In Australia, minors (those under 18) are generally taxed at penalty rates on unearned income such as interest, rent and dividends (this being investment income)
Minor Penalty Tax Rates (2019-20)
|Tax rates for 2019–20 income year
|$0 – $416
|$417 – $1,307
|Nil plus 66% of the excess over $416
|45% of the total amount of income that is not excepted income
There are exemptions to these tax rates, but for the purposes of this article and investment income, these are the tax rates which would apply.
Whose name should I invest in?
As you are investing for your child, some would assume you would simply invest in the child’s name. However, it is important to consider the tax implications of doing this as mentioned above.
Therefore, another common way parents invest for their children is by holding the assets in their own name in trust for the child.
While this helps to avoid the minor penalty tax rates, as the investment is in your own name, you are now liable for the tax obligation of the investment. This might be a problem if you are on a large income and therefore on a higher marginal tax rate.
Determining the best course of action will depend on the size of the investment and the investment vehicle you choose.
What should I invest in?
There are many different investment vehicles and options to choose from. These are some of the most popular choices parents turn to:
Very straightforward and easy to understand. You can set up a standard bank account and begin putting money away for your children.
However, in a low-interest rate environment like the one we are in at the moment, the return on these accounts is quite low. Depending on your investment time frame, there could be better options to get a greater return on your child’s investment.
Shares and Managed Funds
This type of investment is better suited for a long term investment given it is higher risk. However, depending on when you start this investment for your child, you may be prepared to ride the ups and downs of the market to get the greater long term return.
These types of investments generally require legal capacity and as such, they are usually registered in the parents name and held in trust for the child.
If you are wanting to put away some money for your children for a really long time, superannuation could be a great option.
Different super funds have different rules, but generally, children can become members of super funds.
Due to the attractive tax treatment of putting money into super, it is a great long term investment vehicle. However, depending on the exact purpose and time frame of your investment, this may not be right for you or your child.
Investment Bonds (also known as Insurance Bonds)
An investment bond is actually a type of life insurance policy with a twist. These bonds offer a range of different investment options you can invest in and also have special tax rules which can be particularly attractive when investing over a long time frame.
Investment bonds can be withdrawn in part or full at any time, although there may be tax implications.
A great feature of investment bonds is that they can be set up so that when your child reaches a certain age, the ownership of the money passes to them. For example, you may set this up so that when your child reaches 18 they can buy a car, or when they reach 21 this money can be put towards a home deposit or overseas travel.
So what’s right for me?
Deciding on the best investment option for your child will depend on a lot of things including your income, investment time frame, how much and how often you want to invest. However, the most important thing to consider is the goal of the investment.
Whether you are saving for your child’s education, future home deposit, first car or overseas travel will greatly influence what is the right option for you and your family.
If you would like to learn more, please feel free to contact our Financial Planning team via email at email@example.com or by phone on (03) 5833 3000.
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