Daily Mail Australia’s new columnist – James Wrigley, chief financial advisor at First Financial, answers readers’ money questions every Wednesday.
Hello James,
What is the best way to put money aside for our children’s future?
We are currently putting money into a bank account in our child’s name, but the interest is pathetic. What can we do to achieve better returns in the long term and also be fiscally effective?
Kate
James Wrigley joins Daily Mail Australia with his new column The Wealth Builder
Hello Kate,
Great question and one that comes up a lot for parents.
Before I discuss your options, it’s important to understand that minors (children under the age of 18) pay a different tax rate on unearned income than adults. Unearned income includes things like interest on a bank account, dividends from stocks, rent from property, or distributions from trusts.
A minor can only earn $416 in unearned income before paying taxes. Unearned income between $417 and $1,307 is taxed at 66%, unearned income above $1,307 is taxed at 45%. This is to discourage adults from transferring excessive amounts of income and assets into their children’s names and thereby avoiding tax.
If the bank account or investment is in the child’s name, the child must pay the above taxes. Alternatively, as a parent you can leave the bank account or investment in your name (for the child) and have any income added to your tax return and taxed accordingly. If you have a low income, this may be a good option.
Going back to your question about better long-term returns.
Your first option is trying to find the highest interest checking or savings account available, which is unlikely to be at the bank where you do your daily banking. Note: There are still the tax considerations mentioned above.
Your second option – and actually only appropriate if you have a long time horizon (think more than 10 years) – is to invest in the stock market for your child. In this case, low-cost, diversified index-style stock market investments could be a good choice. You can use any number of micro-investment platforms to facilitate this at a fairly low cost and add some sort of regular deposit to the investment.
James Wrigley said a minor can only earn $416 in unearned income before he starts paying taxes (photo of family in photo)
Depending on which platform you used, it may need to be in your name for your child. 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 provide a better return than cash in the bank in the long run.
Your third option is the use of something called an investment bond. An investment bond is a stand-alone tax structure, with a maximum tax on income of 30%.
Just as you can choose an investment option within your pension fund, you can also choose an investment option within the investment bond. They range from cash options to index-style stock investments and much more – the choice is yours. The bond has the advantage of being taxed internally at a maximum rate of 30%, which can be lower than the tax rate you or your child would pay, and also gives you the opportunity to earn stock market returns in the long term. The downside to an investment bond is that they will likely cost more in fees than the micro-equity investment platforms in option 2. You will have to weigh the benefits against the costs.
I hope this helps.
All the best.
James
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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