I have 3 pre-teen children and would like to start an investment portfolio for them. How much do I need, and what would be the best way to do this?
Simon, in Richmond, Vic
Top answer provided by:
There are a couple of options you could look at.
Investment bonds can usually be started with $2,000 and give the kids exposure to investments. You can add 125% of last year’s contributions each year, so if you put $2,000 to start, the following year you could add up to $2,500.
Investment bonds are attractive as the earnings are not assessable to you or the children. Investment bonds are internally taxed at a maximum rate of 30% and if you hold the investment for 10 years and don’t break the 125% rule, there is no capital gains on the sale of the asset.
If you break the 125% rule the 10-year period starts again, so be careful around this. For example, if you don’t put in any money in one year then ANY contribution in the future will reset the 10 year rule. This is because 125% of $0 is $0.
You can switch the underlying investments within the bond at any time and this does not trigger capital gains tax. The tax paid in the investment can be offset by franking credits from Australian Shares, which can help lower the 30% internal tax.
Another option could be to set up a managed investment, exchange traded fund or direct shares in your name As Trustee for the kids. The investment could be started with $2,000 as well. A tax issue may arise in the future if the earnings on the investment are more than $416, as this is how much each ‘minor’ can earn without any tax implications. It may be ok now, but as the balance grows over time this $416 may be an issue.
You can purchase the managed investments, exchange traded funds or shares on most online broking platforms.
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