Can Kids Invest Money?

You may assume that investing is the domain of adults, but can kids invest? Yes! Children are able to participate too. With the assistance of parents, Australian children are able to legally start to build their wealth from an early age. From educating them on the compounding power to preparing them for the financial years to come, creating a place to invest for children can give them a leg up. In this article, let’s look at how your kid can invest, what type of accounts are available, and things to keep in mind when starting.

How Minors Can Lawfully Invest in Australia

In Australia, under 18s cannot directly invest or purchase shares. There’s a catch, however. Parents can establish custodial or trust accounts in children’s names. The parents hold them until the youth reach the age of majority, typically 18. Parents are the trustees and are thus in charge of the investments until the child comes of age.

An application for a Tax File Number (TFN) is necessary if you are a Minor Investor. Without a TFN, any dividend or interest income from investments may attract a withholding tax of approximately 47%. With a TFN, the income will attract the appropriate rate of taxation, which is significantly reduced.

Platforms that make available junior accounts like CommSec, Raiz, and SelfWealth make the parent carry out transactions but enable holdings to be maintained in the child’s name.

Investment Options For Kids

There are a number of children’s investment alternatives available to accommodate various purposes and risk tolerance levels:

High Interest Savings Accounts: A simple solution, these accounts are a secure place to save money and collect interest. They can assist children in learning how to save. Special children’s accounts with bonus interest on regular deposits are available from most banks, making them ideal for younger children just beginning to understand finances.

Term Deposits: With a term deposit, the funds are set aside for a set time, accruing interest. It’s another secure type of investment, ideal to save gifts like birthday money or any amount of money that you want to make grow over time risk-free. Term deposits are backed by the government, so they’re very low-risk, but the downside is that you can’t withdraw the funds until the end of the term.

Shares and Exchange-Traded Funds or ETFs: Shares or exchange-traded funds are a means of increasing wealth in the long run. Shares give ownership of a company, whereas the investment gets diversified across companies to minimise risk through ETFs. Shares are long-term in nature, and parents can hold them on behalf of the child through custodial accounts. The control of the shares shifts to the child upon reaching the age of 18.

Managed Funds and Robo-Advisors: Alternatively, if you do not want to choose stocks or ETFs, managed funds and robo-advisors are a convenient way to invest. Professionals manage managed funds that aggregate funds from multiple investors. Robo-advisors, such as Stockspot, invest on your behalf, composing a portfolio based on how much risk you are willing to take. Several robo-advisors offer a fee waiver on children’s accounts, so they are a cost-friendly option for parents.

Micro-Investing Apps: Micro-investing applications like CommSec Pocket or Raiz make it possible to invest small sums on behalf of a child. For $5 or $50, you can create a portfolio of ETFs. These applications are easy to navigate and allow you to invest in a child’s future even if you have limited funds.

Superannuation: It isn’t the top option of most parents, but children’s superannuation accounts are a form of long-term investment. Using the compounding method, making a super contribution to a child’s super could give them a hefty nest egg by retirement time, although the funds will not be available until retirement, usually 60 or later.

Platforms to Invest for Kids

There are a number of platforms in Australia that assist parents in investing in their children:

CommSec & CommSec Pocket: Parents can open Minor Trust Accounts to invest in shares or make ETF investments on behalf of children through these platforms. CommSec Pocket is a clean, easy-to-use app to invest in ETFs, which has a threshold of just $50 to open.

Raiz Kids: Raiz, also previously known as Acorns, is a micro-investing service that enables you to round up daily purchases and invest the small changes into a diversified portfolio. Raiz Kids enables parents to set up sub-accounts for kids to save small sums of money over time.

Stockspot: Stockspot is a robo-advisor that builds diversified portfolios according to your tolerance for risk. For children’s accounts, they have no management fees under $10,000. It is a simple, hands-free way to invest in the future of your child.

SelfWealth & Superhero: Both of these sites allow parents to invest in Australian and overseas shares in a small account in a parent’s name but with a child as a beneficiary.

Legal and Tax Considerations

Ownership Structure: Your investments are maintained in trust by you, the parent, until the age of 18. So, the child is the beneficiary, but you manage the account. The assets can then be transferred to them when they are 18.

Investment Income Tax: The tax-free amount of income from investments is relatively low for children. Up to $416 of earnings are tax-free. Income that exceeds that amount is assessed at extremely high rates – a top of 66% from $416 to $1,307, and a top of 45% over $1,307. It’s a good idea to keep the income from a child’s investments below the limit or invest in those that pay little taxable income year to year.

Tax File Numbers (TFN): To minimize large withholding taxes, a TFN will be required by your child. It is a simple process to apply for a TFN, and once in possession, you can make sure that any income from investments is taxed appropriately.

Final Thoughts

Investing in your kid can prepare them to achieve future financial success. It is a fabulous way of educating them around money and investing and providing them with a leg-up on acquiring wealth. Whether you set up a high-interest savings plan or invest in shares, there are numerous ways to invest for children in Australia. Be aware of the legal and tax aspects, and select the method of investing that best fits your ambitions and your kid’s future.

Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it, you should consider its appropriateness for you, having regard to those factors. Before making any decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement.