Kickstart their financial future: Investing for kidsKickstart their financial future: Investing for kids

We all want the kids in our lives to be set up for success.

In Australia, one of the best ways to do this is to start investing for kids early. Thanks to compound growth and a long-term investment horizon, regular contributions have the potential to grow into a nest egg for their future. 

We’re taking a look at the benefits of starting investing early and the ways you can invest on behalf of kids. 

Why invest for your kids?

The greatest advantage an investment portfolio has is time. When you start investing early on a kid’s behalf, their money has decades to benefit from compound returns. 

Compound returns means that the earnings from your investments are reinvested to generate their own earnings. Over a short period, the effect is small, but over a long period (like the years and decades before a kid reaches adulthood), the growth compounds.

Beyond this, investing for kids is also a way to teach them about money management. They can follow the progress of their investments, learn about dividends and understand risk. Developing confidence with financial concepts can provide a big advantage later in life.

Choosing the right investment structure for your situation

In Australia, how you choose to hold an investment is important because of tax implications. This decision impacts who pays tax on the earnings and when capital gains tax (CGT) is triggered. Here are a few options.

Minor Trust Account

• Who manages the asset? The parent or adult (you don’t need to be their parent or caregiver).

• Whose TFN is used? The kid’s TFN is used.

• Who pays the yearly tax on earnings? The kid — in Australia, if a minor's investment income (for example, from dividends or interest) exceeds $416 annually, it's classified as 'unearned income’ and is subject to penalty tax rates.

• Tax when the kid turns 18? No CGT for the parent when the kid takes over.

• Most suited for? Investments that focus on long-term capital growth, rather than income, which may help reduce your tax obligation at tax time.

In the parent’s name

• Who manages the asset? The parent.

• Whose TFN is used? The parent’s TFN is used.

• Who pays the yearly tax on earnings? The parent (at their usual income tax rate).

• Tax when the kid turns 18? Yes, CGT is triggered—as this is considered a disposal, the parent must pay tax on any profit when they transfer the ownership to the child.

• Most suited for? This path may be favourable for the sake of simplicity or if you’re in a lower tax bracket.

Investment options for kid's portfolios

There are two main ways to invest with apps like Sharesies. You can buy shares in specific companies, or you can invest in exchange-traded funds (ETFs). ETFs usually spread your money across a range of other investments, like shares in companies, bonds, and property.

Investing in funds helps you diversify by spreading your money across lots of different things, while investing in companies gives you exposure to that specific company. You can spread your investments across as many companies and funds as you like!

Our Kids Accounts give you the opportunity to manage your kid’s investment portfolio alongside your own, all in the Sharesies app.

How Kids Accounts work at Sharesies

You can open a Kids Account for anyone under 18 years old. You don't need to be their parent or caregiver. You control and manage the Kids Account on the child’s behalf, and must act for the kidʻs benefit only.

There are a couple ways to get started:

• If you provide your kid’s TFN, there’s no tax paid on up to $416 income from investments per year. For the tax rates that apply above this amount, see the ATO website. 

• If your kid doesn’t have a TFN yet you can still open the Kids Account, however you’ll need to keep evidence of beneficial ownership of your kid. 

• If you used your own TFN, you’d likely be considered the owner of the account and not your child.

• Read more on tax options when investing for a kid in our help centre.

Simplify investing for kids

Life is busy (to say the least), so auto-invest can make forming an investing habit a little more straightforward. 

Our auto-invest feature simplifies the process of buying investments regularly and can help you put dollar-cost averaging into practice. Simply pick your investments and the amount you want to regularly invest and auto-invest will place the orders for you. Invest any amount over $5 every week, fortnight, four weeks, or month.

Making investing a shared habit

To help build their future, investing for a kid can be integrated into your habits. 

• Tie it to your own investing habits: Couple your personal investing habit with your kids and make contributions to both accounts. 

• Make money conversations normal: Use this as an opportunity to kickstart discussions about money, helping to build their financial literacy at the same time. 

• Give the gift of investing: Encourage family and friends to contribute a small amount to the investment account instead of toys for birthdays and holidays with a Sharesies Gift. 

Good luck with investing for your kids, and remember, time is on their side.