We all know how expensive life is as a grown up and that’s why so many parents want to give their kids a helping hand financially down the track.
The first step to choosing a path to saving for your kids’ future is asking yourself a few key questions. Can you adjust your current lifestyle to make the necessary funds available to put aside for your kids’ future? How much can you afford?
Once you have an amount in mind that fits into your budget, several options are available. The option you choose will depend on your income, cashflow and timeframe.
Savings accounts and term deposits
Savings accounts and term deposits are the simplest options, and unlike the other alternatives described below, can be set-up in your kids’ names with little tax impact. They don’t offer much of a return when compared to the alternatives, and typically a certain amount will need to be deposited each month to benefit from higher interest rate bonuses. It’s essential to shop around between the banks to get the best deal for these types of financial products, as they can vary widely.
Another option is putting the funds into an offset facility against your mortgage. The funds remain in your name, but you earmark the funds for your kids. This option does require a high level of self-discipline. Some banks let you set-up separate offset accounts, which makes record keeping a lot easier and reduces the temptation to spend the funds on other expenses.
For a long-term investment, shares offer the opportunity for kids to learn more about the market as they grow up, and they can eventually take an active role in investing. Because of broker fees, small investment contributions are unlikely to be effective. To get around this, you could put money aside each month into a savings account and invest your chosen shares annually. Speak to your accountant before investing in direct shares as there are tax implications when investing in shares for kids.
Managed funds have the benefit of requiring less of your time than shares once they are set up. You can set-up regular investment plans and have access to a greater spread of investments. Speak to your accountant before setting up a managed fund as there are tax implications that relate to the owner of the funds.
For investors with a marginal tax rate higher than 30%, investment bonds (also known as insurance or growth bonds) can provide a tax-effective way to save for your kids’ future.
An investment bond is designed for investors to hold onto for at least ten years. You pay tax inside the fund along the way. You can also make additional and regular contributions over the life of the investment bond. To take advantage of the tax benefits of this product, you can only contribute 125% of your previous year’s contribution.
If you do make any withdrawals in the first ten years, then the investment can be transferred tax-free to your child at a specific time (i.e. when they turn 21).
Whether it’s helping them buy a car or their first home, your kids will be grateful that you put in plan a place now to help them out. Speak to us on 03 9553 0271 to find out which is the best fit for you and your family.
Source: Clientcomm library
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