Before a child is old enough to make their own decisions, what should happen with the money they receive? Grandma and Grandpa may decide to send their grandchild a check for their birthday. The child may win prize money for a competition at school. Giving the money to a child not able to handle these types of decisions is irresponsible. So, whose responsibility is it? As a parent, you have full financial control of your children’s money until they are able to take over its management when they come of age. What you do with these funds lays the groundwork for your child’s financial future.
The Junior ISA
Setting up a junior isa is the first step in handling your child’s money responsibly. There are benefits to setting aside money for your child, up to the yearly limit. You can choose to set up the cash version of a junior ISA or the stocks and shares version.
The cash version of a junior ISA involves setting money aside much like you would a savings account. The money will earn interest but with a lower rate of return than its counterpart (stocks and shares). The money is not subject to any type of income tax and if you find yourself in need of the money for something like band equipment or a special summer camp, you can easily transfer the money into one of your current accounts.
The other option for a junior ISA is the stocks and shares account. Here, the money deposited is converted into stocks and shares. The balance grows based on the type of investments made. The tax savings involve the gains the account makes. There is no tax on the dividend or capital gain that comes from the account.
Both options are a low risk way to set your child’s money aside in a valuable way. At 16, you have the option to turn the funds over to your child. However, there are benefits for waiting until they turn 18. Once 18, your child can choose to convert their account into an adult ISA savings account and continue taking advantage of the tax-free savings. Both children and adults may find themselves surprised when they realize the amount they have saved over the past few years.
529 College Savings Plan
As a parent, you want to be able to give your child the opportunity to experience higher education. With tuitions costs continuing to increase, this can be a real challenge. The money your child accumulates can also be placed into a 529 College Savings Plan. This is a great way to take advantage of the tax break, usually offered at the state level, for making a deposit into a 529 account and any growth is tax deferred.
A traditional plan gives your child money to use in a variety of ways after high school graduation. Whether they stay in state or decide to attend in another country, the account will help pay for some of the expenses. You choose the type of investments you make as well as the amount of risk you are willing to take with the money you deposit.
When your child turns 18 and wants to attend college or a trade school, they will have money in the bank to help offset the cost. If you invested well, your balance will have grown and your child will have a head start on financing their college experience.
You can always set up a traditional savings account in your child’s name at any local or online bank. Many parents choose to place most of their children’s money in a junior ISA or a 529 College Savings Plan or both. However, a savings account is a great way to teach your child about money and give them a more concrete understanding of saving. While you are not going to find benefits in deferred taxes or in skipping over the capital gains tax, providing your child with a lesson on using money wisely is a valuable option.
Ideally, put some money into each account. A junior ISA sets aside money for your child to do with as they please when they turn 18. They can use the money to purchase a car or pay for tuition. At some point, they can even use it as part of a down payment on a home. The 529 College Savings account is a great way to give them a boost when it comes to paying for college. You can’t go wrong when you set aside money for education. Finally, a traditional savings account is a good way to get your child into the habit of saving from a very early age.
Your child’s money is your responsibility but so is their introduction and instruction in finance. In each of these instances, you have the opportunity to demonstrate exactly what saving money can do and how it can affect the future. Instead of just telling your kids about the importance of saving, you are showing them.
At some point, before they turn 18, explain to your child what you did with their money. Show them the account statements. Let them see exactly how money can grow over time. An older child may want to add their own contribution to the accounts when they see what can happen when you save. Your wise investments can pay off in a big way.
This article was written by Katie Malcolm, a writer for moneysupermarket.com – a comparison website offering information on everything from junior isas to mortgages.