Imagine your child entering adulthood with a financial head start, ready to pursue their dreams without the burden of money worries. It’s not just a fantasy—if you’re in a position to make it happen, it’s the result of careful planning and long-term sacrifice. When it comes to securing a strong financial future for your child or children, traditional saving and investing options might not be ideal.
At First Financial, we specialise in helping our clients retire life-ready, including setting up their loved ones with the best possible financial future. In Australia, children who earn more than $416 in unearned income, such as interest or dividends, are subject to penalty tax rates, making alternative options essential.
Here are some more effective, tax-efficient strategies to consider.
Using an offset account for savings
To optimise your child’s savings, consider using a mortgage offset account. Instead of depositing funds into a traditional savings account, place the money into a separate offset account linked to your home loan. This approach reduces your mortgage interest while allowing the savings to grow tax-free.
The key advantage here is that your child’s savings work to lower your mortgage interest, which often provides a better return than a savings account. Additionally, because the savings are offsetting your mortgage, there’s no tax on the interest saved. This strategy would help you repay your home loan faster allowing you to help them more once your loan is extinguished.
While this option requires discipline to ensure the funds are indeed earmarked for your child’s future, it’s worth considering for those with existing mortgages looking to optimise their financial planning.
Investing in the share market
Another approach is investing in the share market, either in your child’s name or yours. If the investment is under your name, the income will be taxed at your marginal rate. If it’s in your child’s name, they can earn up to $416 tax-free, but any income beyond that will face significant tax penalties.
This strategy requires careful attention to tax implications to ensure it aligns with your financial goals.
Australian shares often come with franking credits, which can help reduce some of the tax liability. Whether you reinvest dividends or take them as cash, any income generated must be declared on a tax return. This tactic can be beneficial if managed carefully, especially for families aiming to instil financial literacy and investment skills in their children.
While investing in shares can be profitable, it does come with risks. For those with a long-term outlook and the patience to navigate market fluctuations, it can be a rewarding way to build multigenerational wealth. It’s always best to consult with your financial adviser to tailor your investment strategy to your specific goals and risk tolerance.
Investment and education bonds
Investment bonds and education bonds are distinct financial tools, each serving different purposes. Investment bonds are a tax-effective way to save and invest for various future needs, including your child’s future.
They are taxed internally at a maximum rate of 30%, which helps you avoid the high penalty rates associated with direct investments in a child’s name.
On the other hand, education bonds are specifically designed to fund educational expenses, offering similar tax benefits. Both types of bonds can provide an effective way to build savings while minimising tax liabilities.
These bonds are flexible, allowing you to change ownership to your child at a future date without triggering any tax liabilities. This makes them a popular choice for parents and grandparents who want to ensure the money is available for education or other significant life events.
One of the key advantages of investment bonds is that, after 10 years, any withdrawals are completely tax-free. This feature makes them an excellent choice for long-term savings, particularly for those looking to make regular contributions over many years. If you need to access the funds before the 10-year mark, you can do so, but you may be liable for some additional tax depending on your marginal rate.
Evaluating the best options for your family and financial goals
When planning for your child’s financial future, it’s crucial to evaluate each strategy’s benefits and risks. Offset accounts offer a low-risk, tax-free way to save while reducing mortgage interest, making them a practical choice for conservative investors.
In contrast, investing in shares can yield higher returns but comes with increased market risk and requires a long-term perspective.
Investment bonds strike a balance by providing tax efficiency with an internal tax rate of up to 30%, helping to mitigate the high penalty rates on direct investments.
At First Financial, many clients choose this option for its ability to blend tax efficiency with long-term growth potential.
Talk to the financial planning and long-term investment experts
To determine the best alternatives for your personal and family situation, seeking professional advice is essential.
At First Financial, we understand the complexities of financial planning for future generations. Our financial advisers can help tailor a strategy that suits your family’s needs, ensuring that your children are on a solid pathway to wealth.
Ready to start planning for your child’s financial future? Contact a friendly member of our team today to learn more about the available options for saving and investing.
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