Giving the gift of investing
Did you have a savings account when you were young? It wasn’t uncommon and those old Passbook accounts funded many a first car.
Now you’re a parent, are you thinking of opening an account for your kids? Record low interest rates have taken some of the fun out of watching bank accounts grow, but there are alternatives.
For example, have you considered a share portfolio?
Direct shares follow market movements, whether that be up or down, but over time, quality shares have greater growth potential than many other investment types.
For a child’s investment fund, you’re probably looking at a savings term around 15 to 20 years – ideal for riding market ups-and-downs.
When Lincoln was born, his parents discussed possible long-term investments with their financial planner, and settled on a portfolio of diverse assets suitable for a 15-20 year time horizon.
Meanwhile, Lincoln’s grandparents chose to open a traditional savings account at their preferred bank.
How did the two compare?
Consider the following example:
Initial investment: $500
Monthly contribution: $50
Investment term: 20 years
Assumptions: Savings account return calculated on 1% per annum interest. Share portfolio return 4% per annum based on a comparison of mixed Balanced Asset funds over the past three years to December 2020.
This example demonstrates how shares, year-on-year, can potentially outpace a savings account. By year 20, Lincoln’s projected Savings Account balance was $13,899 and his projected Share Portfolio balance was $19,450.
Straight-forward? Not so fast, as here are a few other points to think about.
Tax and TFNs
Your child can have a tax file number (TFN) – there’s no minimum age. All funds will request a TFN, but whether you quote the child’s TFN or your own depends on a number of factors like who is contributing to the investment, whether the money is being used, etc.
Tax is tricky too. Your child’s age and whether they’re earning their own money will determine whether they have an income tax liability and need to lodge a tax return.
Additionally, there’s Capital Gains Tax (CGT). Share portfolios are assessed for CGT if the assets are sold for more than their purchase price. The amount of CGT payable will depend on a number of elements, but your tax agent will be able to assist.
There will always be tax, but how much, what type and how it is calculated will depend on your, and your child’s, circumstances.
Do your sums to work out the most suitable tax outcome for you and your child. Remember that mistakes can be costly so it’s wise to consult a tax accountant for personalised advice.
Trusts
Many people consider setting up a trust for the children’s savings, as it helps to protect the assets in the child’s name. There are two types of trusts and they’re quite different.
Trust accounts are accounts held at a bank that you open for your child, but you retain ownership. When the child turns 18, control of the account passes to them.
Trust funds are legal arrangements, managed by trustees for the child’s benefit. They’re generally used for substantial investments and the child can access the assets once they attain a certain age.
Where trust funds are concerned, forget everything you thought you knew about tax and speak to a professional with expertise in family trust arrangements.
Everyone’s situation is different and investment types and structures are not one-size-suits-all. Before making any decisions, seek the advice of qualified professionals, and regardless of whether you choose a share portfolio or an alternative investment, you’ll be across your options and confident that your particular needs are being met. Â
Do you have a question?
Latest Blog Articles
Warning:Â Redrawing investment loans
The ATO estimates that incorrect reporting of rental property income and expenses is costing around $1 billion each year in forgone tax revenue. A big part of the problem is how taxpayers are claiming interest on their investment property loans. – Redrawing investment loans.
Fortify your finances: A recession survival guide
In this article, we explore how you can protect your finances against the impacts of an economic recession. – Fortify your finances: A recession survival guide.
Roadmap to early retirement
This article discusses the aspiration of early retirement and emphasises the importance of planning and dedication to achieve this goal. It highlights key steps, including assessing one’s financial situation, creating a tailored financial plan, minimising unnecessary spending, and diversifying investments to ensure a comfortable retirement lifestyle. – Roadmap to early retirement.
Harvesting financial success
This article outlines easy ways to inspire good financial habits of goal setting, paying down bad debt, budgeting, savings plan, and insurance. – Harvesting financial success.
The impact of interest rates on managing debt
Managing debt can be challenging, especially when interest rates are involved. Understanding the impact of interest rates on debt is crucial to help individuals make informed financial decisions. This article explores how interest rates affect managing debt and provide some tips on how to navigate these challenges. – The impact of interest rates on managing debt.
Financial Advice services are provided by Insight Financial Partners Pty Ltd T/A Insight Wealth Perth as a Corporate Authorised Representative of
Australian Unity Personal Financial Services Limited (ABN 26 098 725 145), AFS Licence no. 234459.
PRIVACY POLICYÂ Â Â Â Â Â Â FINANCIAL SERVICES GUIDE