7 things to avoid when setting up accounts for your kids
Setting up your kids' financial futures isn't as simple as when you were their age, and making mistakes could wind up costing them dearly.
It's fantastic that you're planning to teach your children about money and set up a nest egg of their own.
Set things up properly from the outset to give them the greatest possible value - paying particular attention to avoiding these common mistakes:
1. Choosing the wrong structure
It's easy to choose the wrong structure for two simple reasons:
- You may not know about all of the options available.
- You aren't clear on why you're doing it.
There are numerous options to invest in, including high-interest savings accounts, everyday accounts, online accounts, bonds, term deposits, and then the structure, what sort of trust?
When it comes to trusts, some can be established now or, as with Testamentary Trusts, come into effect upon your death (which must be properly set up as a part of your will).
Others serve a particular purpose, like special disability trusts.
The best option for your family will depend on a range of factors, including what the money will be used for, when it will be accessed, Centrelink or tax implications, control requirements and your preferred level of risk.
2. Rushing in
Maybe you succumb to the first ad you see? Or go to your existing bank without shopping around? That could cost your child thousands.
Check out different banks, credit unions and other options for the best deal, because that money should be working its hardest for your children - now and into the future.
Carefully scrutinise:
- establishment fees and ongoing costs.
- interest rates.
- how often interest is paid.
- introductory offers - they may only last short-term or have hidden costs.
- conditions and restrictions - e.g., minimum balances, contribution caps, withdrawal restrictions.
3. Not planning ahead
Where will the money come from? Will you be penalised for missing a regular contribution? Can you still afford to make contributions if you lose your job? What about if more children come along?
These are questions you should ask yourself in advance. Not planning ahead means your children could miss out on the full benefits of their account/trust, while you could inadvertently set yourself up for problems later on.
4. Overlooking access
Consider what you'd like the money to be used for, as this helps determine at what age they should access it.
A savings account could be in your and their names so that withdrawals can only be made with your knowledge.
Trusts can be held until your child reaches a certain age - such as 18 to pay for student loans, a 21st gift, to put towards a property purchase down the track.
Either way, such conditions generally need to be established from the outset.
5. Ignoring inflation
With inflation currently exceeding the rates on most savings accounts, consider whether you're actually doing your kids a disservice by setting cash aside for them. Could that money grow faster if it was invested differently?
However, that may be offset by the lower risk and better accessibility of cash.
6. Neglecting the tax man
Just because your child may be under 18, doesn't mean they escape paying tax. Plus, children have different tax rates to adults.
So-called 'unearned income' - i.e. income generated from dividends and investments, rather than paid work - is capped at just $416 annually for kids before becoming taxable. Tax is paid at a hefty 66% over that amount, or 45% over $1307.
Different types of trusts are also treated differently for tax and Centrelink purposes.
Additionally, whether the account/trust is solely in your child's name or jointly in theirs and your/your partner's names impacts how much tax will be applied.
Hence tax is a crucial consideration, particularly as the value of the account/trust grows over time.
7. Forgetfulness
It may sound implausible right now, but especially if your child is very young, the existence of their new bank account or trust could be forgotten over the years.
That means its value could be eroded in fees and taxes, not to mention the stunted growth from a lack of contributions.
Such oversight also causes kids to miss out on important lessons around managing money, compound interest, as well as the skill of saving (like their allowance and birthday/Christmas cash).
Make a point of reviewing it regularly with them and enjoy watching it grow together!
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