I am often asked, “What is the best way to save for my daughter’s university degree?” or “We want to help our son with a deposit on his first home, should we invest in his name or ours?”. Investing for children is fairly simple yet the best way to set up such investments is not as straight-forward as you might think.
Factors such as income tax, liquidity, time frame, negative gearing, legal ownership, expected rate of return and Capital Gains Tax all have a part to play, and the ideal strategy can differ depending on individual circumstances. Here are more details on each of these areas.
Income Tax
Gone are the days of putting assets in a child’s name to save on income tax. Children under 18 years old can earn a mere $416 tax-free (excluding employment income, income from a Testamentary Trust and/or other excluded income). Any income above this amount is taxed at the highest marginal tax rate; so creating an investment portfolio in your child’s name may not be such a good idea.
Liquidity
Being able to access the money in the event of an emergency can influence where and how you invest. If you contribute money to your child’s superannuation account (which can be done, there are no rules prohibiting making super contributions for children), keep in mind that they most likely can’t access the money until they’re age 60.
Similarly, if you invest in an investment bond there can be tax penalties for withdrawing before the 10-year maturity date.
Legal Ownership
Before making an investment, you must first decide if it will be in your name, in your child’s name or in trust (formal or informal). Holding an investment directly in a child’s name may seem OK at the outset if investment income is low, but over the long-term it could result in a costly tax bill.
Time Frame
Creating a savings account at the bank might seem like an easy place to start, but if you don’t intend on using the money for 10 years or more, it might not be wise to commit to such a low rate of return.
Consider this: if you save $100 per month for 20 years and earn 2% pa interest, you will end up with just under $30,000. However, if you save the same amount for the same time and invest in a diversified portfolio (e.g. a low-cost managed investment) and earn 7% p.a., you end up with over $52,000 (Source: moneysmart.gov.au). Selecting an investment suitable to your time frame can make a big difference over the long-term.
Investing for children need not be difficult, but it isn’t as simple as it seems. Be sure to consider the above areas and always seek professional financial advice if you need help.
If you have any questions or concerns, please get in touch with us.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online
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