Daily Mail Australia’s new columnist James Wrigley, senior financial advisor at First Financial, answers readers’ money questions every Wednesday.
Hello James,
What is the best way to save money for our children’s future?
At the moment, we are depositing amounts into a bank account in our son’s name, but the interest is pitiful. What can we do that will perform better in the long term and also be fiscally efficient?
Kate
James Wrigley joins Daily Mail Australia with new column The Wealth Builder
Hi Kate,
Great question and one that comes up a lot from parents.
Before we get into your options, it’s important to understand that minors (children under 18) pay a different tax rate on unearned income than adults pay. Unearned income is things like interest from a bank account, stock dividends, rentals from property, or distributions from trusts.
A minor can only earn $416 in unearned income before starting to pay taxes. Unearned income between $417 and $1,307 is taxed at 66%, unearned income over $1,307 is taxed at 45%. This is to discourage adults from putting excessive amounts of income and assets in their children’s names and trying to avoid paying taxes in the process.
If the bank account or investment is in the child’s name, then the child will have to pay the above taxes. Alternatively, as a parent, you could have the bank account or investment in your name (for the child) and add any income to your tax return and tax it accordingly. If you are low income, this may be a good option.
Going back to your question about better long-term returns.
His first option is trying to find the highest interest cash account or savings account available, which is unlikely to be at the bank you do your daily banking with. Please note that the tax considerations mentioned above still exist.
His second option – and it’s really only appropriate if you have a long time horizon (think 10+ years) – is to start investing for your child in the stock market. In this case, low-cost, diversified index-style stock market investments could be a good option. You can use any number of micro-investing platforms to facilitate this at a reasonably low cost and add some form of regular deposit to the investment.
James Wrigley said a minor can only earn $416 in unearned income before they start paying taxes (file photo of a family)
Depending on the platform you used, it may need to be owned by your child in their name. As with the cash account, the same tax rule would apply. While historical returns cannot be relied on for future returns, this is likely to generate a better long-term return than cash in the bank.
His third option is to use something called an investment bond. An investment bond is a separate tax structure, where income tax is capped at 30%.
Just as you can choose an investment option within your retirement fund, you can choose an investment option within the investment bond. They range from cash options to index-style stock investments and more – you decide. The bond has the advantage of being subject to internal taxes at a maximum rate of 30%, which could be lower than the tax rate you or your child would pay, as well as giving you the ability to earn long-term stock market returns. The downside to an investment bond is that it will likely cost more in fees than the micro-stock investment platforms in option 2. You will have to weigh the benefits against the costs.
I hope this helps.
All the best.
Jaime
Send your questions to James at thewealthbuilder@dailymail.com.au
James Wrigley is a representative of First Financial PTY LTD ABN 15 167 177 817 AFSL 481098
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