Savings Smart Guide

6. The next generation

What you'll learn in this step: it pays to pass on good habits.

Having sorted out your own finances, if you're a parent you may want to think about kicking off your children's savings, while also teaching them some good habits.

A number of banks offer special accounts for children. Some, such as Commonwealth Bank's Youthsaver account, offer “bonus” interest if there are no withdrawals over a set period – making what can be a fairly low upfront interest rate more worthwhile.

But before you jump into a children's account, think about whether you'd be better off in something like an online savings account.

Once the interest income starts to build – or the kids have accumulated enough to take the next step into a managed fund – you'll have to think about the impact of so-called “children's tax”.

There are special tax rules to prevent parents avoiding tax by splitting income with their offspring, and as a result higher tax rates kick in much earlier for children. Every dollar of “eligible income” – income the child didn't actively earn through a job – exceeding a threshold of $416 but below a cap of $1445 is taxed at a whopping 66 cents. Once the child exceeds that upper limit, they're taxed at a still high 48.5 per cent flat rate on all income.

Read more about:

Plenty to ponder when they go from piggy bank to real thing, Debra Cleveland, May 21, 2006 – The Sun Herald: Debra Cleveland surveys the array of accounts on offer.