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Which way to go for Investing for Kids future?

Discussion in 'General Investing Discussion' started by KP, 27th Jan, 2009.

  1. KP

    KP Member

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    Hi,

    In these troubled times, which is the better option to invest for kids future? (7 to 10 years time frame , purpose is for uni fees etc..)

    Is it worth buying few blue chip shares and hold them for this purpose? or is it worth depositing in bank in fixed terms? or managed funds?

    I have $6000 to start with and $300 monthly contributions, which way is it better?

    Thanks in advance for your suggestions.

    KP
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Over 7 - 10 years, I think you should do okay with a nicely diversified share portfolio.

    The problem with direct shares (which includes ETFs) is the brokerage costs for regular monthly contributions - it's just too high to justify.

    I suggest you look for some Blue Chip share funds or a low cost index tracking fund (eg Vanguard) which offers the ability to make regular monthly contributions.

    Alternatively, you could invest in the STW ASX200 tracking ETF (gives you broad exposure to Australia's top 200 shares with very low management costs), and rather than making contributions monthly, instead put the monthly contributions aside into a high interest savings account (eg ING Direct etc), and then perhaps once or twice a year, invest that money into the ETF. This would make brokerage much more affordable.
     
  3. KP

    KP Member

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    Thanks Sim,

    It seems the index fund might be the option to reduce the costs.

    For the index fund (ASX200), do you recommend any fund managers? Are there fund managers other than SPDR offering index funds?

    rgds,
    KP
     
  4. Waimate01

    Waimate01 Well-Known Member

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    Sim, I was under the impression the tax on un-earned income was a real problem for minors.

    For example, I know of someone whose 9 year old daughter is going to inherit around $80k, and as I understand it she will be slugged tax at the flat rate of 47.5% for everything over $772 of income (dividends, interest, etc). In other words, they do not get to ride the lower tax scales like an adult does - they go straight to their max.

    Thus, as I understand it, it may well be better to keep the investment in your own name, and just notionally earmark it as theirs until they turn 18.

    -- Ian
     
  5. AsxBroker

    AsxBroker Well-Known Member

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    Hi Waimate,

    You are correct.

    I'd be suggesting a Tax Effective Investment Bond which is a flat 30% on income and the minor doesn't have to pay any tax in their own name. Then after a FULL 10 years there is no tax on the capital gain.


    Tax rates for minors can be found here Income of individuals under the age of 18 The $772 is the ATOs $416 plus a Low Income Tax Offset. Above this the rate is 66% up until $1,307 which is then the maximum adult marginal tax rate.


    Cheers,

    Dan

    PS This is general information. Before making an investment decision speak to a FPA registered Financial Planner.
     
    Last edited by a moderator: 27th Jan, 2009
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, I was not assuming the investments would be in the kids names - I don't think it was suggested by the original poster that it would be.

    Either way, you are quite right in pointing this out - don't put it in the kids names. Either hold it in your own name (or more specifically, in the name of the adult who is the lowest income earner), or use a family trust (not worth it for a small amount being invested though).
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Vanguard have a range of index funds which may be suitable. I haven't invested in them myself, so I don't have any personal experience and can't make any specific comments about them.

    Vanguard Investor Index Funds | Our products | Vanguard
     
  8. Waimate01

    Waimate01 Well-Known Member

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    You are so right - I was seeing something which wasn't even between the lines. Polluted by my own thoughts elsewhere. :)
     
  9. KP

    KP Member

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    Thanks guys for all your suggestions,

    Really it is great site. Congrats to Sim and his team.

    Sim is right, i am not investing in kid's name due to tax implications.

    Last year we used Bank West Kids Bonus Saver Account ( they gave 10% interest last year, this year it is 8%) to save $250 every month for each of my two kids. After one year we have to withdraw the money from their accounts, thats where my dilemma came on how to invest that money.

    I am planning to keep all my investments in my wife's name as she is not working to avoid tax on the returns.


    Regards,
    KP