I love asking my kids what they want to be when they grow up. My 7-year-old daughter wants to be a teacher, whilst my 10-year-old son wants to be a Formula 1 driver. The careers they want to pursue have changed over the years, but one thing remains: they will need money to fund their dreams and aspirations.
I was close to being financially excluded. I could not register for my final year of studies because there were outstanding fees due to lack of funds. Having experienced financial challenges whilst pursuing my studies at university, I want to avoid my kids experiencing that same financial deficit. That’s why I’ve decided to equip myself with knowledge and invest for my kids to financially secure their future.
It has been estimated that in South Africa, the cost of having and raising one child can easily reach R1,681,470 from birth to age 18 for the average middle-income family. That's more than R90,000 a year. As a parent, investing in your child's future is crucial, especially considering the high cost of raising a child.
What to consider before investing in your child’s name
The decision on whether to invest in a parent's account (in your name) or a child's account (in their name) is an important one. There are 5 considerations to take into account when making this decision:
- Determine the purpose of the investment. Is it for funding your child's education and hobbies, or to kickstart their financial journey? This will help you decide which account to use.
- Consider income tax implications. Returns received on a parent or guardian's investment will be taxed as part of the parent’s tax return. Any returns on money invested by a parent in a child’s name will also form part of the parent's tax return, however returns on money invested by any party other than the parent on the child's behalf will form part of the child’s tax return. If the amounts are below the annual thresholds, there is no need to submit a tax return for the child. Tax-free savings accounts in the child's name are great vehicles to bypass any payable tax (besides donations tax) and are best for building long-term wealth for your child (and not for shorter-term goals, like funding school fees). Read more about how investments are taxed.
- Be aware of donation tax and annual limitations. If you’re putting money into your child’s account (in their name), you might be subject to donations tax. The South African Revenue Service (SARS) makes provision for an annual aggregate donations tax threshold of R100,000 – that means no donations tax is payable for that amount or below (this is in total and not per donation). Donations tax is currently 20%. When investing in the parent or guardian's name, it’s not considered a ‘donation’ so there’s no limitation.
- Consider access and control over the investment fund. You as the parent or guardian will act as the authorised user on the minor accounts until the child turns 18 years old and gains access to the account. Once that happens, It's essential to ensure that your child is well-equipped to manage the account independently when they come of age as legally the account will be now fully under their control. Read more about Money Lessons to Teach Your Child.
- Consider what happens to your children's investments when you die. If the investment is in your name as the parent or guardian, you need to ensure you have provisioned for them to receive that money in your will. Investing in a minor child's account means that the investment does not form part of the parent's estate, and the child's investments will not be subject to estate duty.
Questions to ask before finding the best way to invest for your child’s future
When it comes to investing for your child, it should be simple and uncomplicated. There are a few questions I ask myself when deciding where to invest for my child:
- Can I easily understand the investment offering?
- What am I investing in?
- What fees will I be charged?
- How will my money grow over time?
- What is the risk of losing my money?
By following this thought process, you can make an informed decision about how to invest in your child's future. There are various ways parents can invest in their kid’s financial future and wellness, so it is important to understand the implications of investing in your child's name versus investing in your name on behalf of your child.