March 14th, 2010 | 
Author: When your salary stops at retirement, will you have enough to pay your bills, travel and live the lifestyle that you want in your Golden Years?  Sure, you may be one of the lucky ones with a pension. Social Security may even still be around. But if you want to live your vision of retirement, then saving and investing properly is important.  And how you pay for college for your kids will impact your own retirement.  Think about this: College tuition, books, fees and housing continue to increase at a rate faster than inflation in general. Based on current trends, the cost of sending just two kids to a private or elite college for a total of eight years will cost more than $360,000 if paid after taxes. This means that those in the 28 percent tax bracket need to earn more than $500,000 in order to meet the costs from cash flow.  Regardless of where you send your kids to school, the bottom-line fact is this: How you pay for college impacts how much you save for retirement. For every dollar that you save on college costs means more for your personal retirement down the road.  There are a number of strategies you can use to improve your chances at a better retirement and a solid education at a lower personal cost.  There are more than thirteen strategies for increasing needs-based aid. There are at least a dozen cost-cutting ways that any family can use to improve their bottom line.  Ultimately, it depends on how well you know how to use the IRS code for your advantage to lower your own Expected Family Contribution (or EFC in financial aid parlance).  Regardless of whether you expect to qualify for needs-based aid or not, here are some examples of cost-cutting strategies available to you.
Strategy 1: Get College Credit Through Exams By taking Advanced Placement exams or even a “challenge” exam for basic college courses, a student can get through school quicker potentially saving thousands in tuition and fees. Opportunities are available for Advanced Placement (AP), College-Level Examination Program (CLEP) or DSST exams for 37 different courses. For more information on these, check out the CollegeBoard or search “Get College Credit.”
Strategy 2: Stay Local In-state tuition and fees at a public higher education institution is a bargain compared to the elites and even crossing the border to go to another state’s public college. If you are considering going across the border or away, consider having your child establish residency in that state. Find out what the residency requirement are ahead of time by contacting the admissions office.
Strategy 3: Get the Credit You Deserve from the IRS Use the Hope Education Credit, renamed the “American Opportunity Tax Credit.” This was recently increased to $2,500 (from $1,200) and now applies to all four years of college, not just the first two. In addition, forty-percent of the credit is now refundable. Another helping-hand comes in the form of the Lifetime Learning Credit which is available for one family member and allows you to take up to 40% credit on educational expenses up to $10,000. Income limits apply so be sure to consult a qualified tax professional or visit the IRS website.
Strategy 4: Employ Your Child If you own a business, work as an independent contractor or own rental real estate, consider hiring your child to work for you. Maybe your child can provide administrative support or help with marketing or real estate related chores. By hiring a child and paying him or her, you will lower your own personal taxable income through a business expense deduction and provide income for your child. In addition, the child can use the earnings to open a Roth IRA, a tax-favored retirement account which is not assessed as an asset for financial aid purposes. And if needed, a child can withdraw a portion of the proceeds to pay for qualified educational expenses. There are certain limits and time restrictions that apply.
Strategy 5: Establish a Section 127 Educational Assistance Plan As a business owner you can establish a Section 127 employer-paid tuition benefits program for your employees. This plan allows the business owner to pay up to $5,250 per year to employees (including employed children) as a qualified tax deductible expense. This can be used for both undergraduate and graduate programs of study. Assuming that Junior was going to work in the family business during the summer and throughout the year, Junior can earn a wage (deductible expense for the business) which he can use for his own support and Roth IRA contribution (which may be eligible for paying educational expenses) and earn a tuition benefit (another deductible business expense). If you were going to give the child the money anyway, you may as well structure it to be tax deductible.  Consider this: There are more than 110 different other strategies for you to consider. All the more reason to have a coordinated plan in place by speaking with a professional advisor who can help evaluate these options with you.  Food for thought:
Encourage your pre-teen to open a Roth IRA with earnings from their paper route or other jobs.
Consider hiring your child to work in your business or help with chores related to your investment property.
Use a CollegeSure CD issued by an FDIC-insured bank to accumulate savings
Think about using a fixed income annuity to hold a portion of money for college to avoid the potential loss in principal that can happen with a 529 plan invested in mutual funds.
Pursue private and merit-based scholarships (For more information on some of these options, check out Fast Web, the CollegBoard and the Scholarship Experts or the Scholarship Coach on the web.
Steven Stanganelli, CRPC®, CFP®, is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with an independent fee-only financial planning and investment advisory firm with offices in Massachusetts in Woburn, Lynnfield and Amesbury.
Steve is a five-star rated advisor by the independent Paladin Registry. He specializes in working with business owners, busy executives, medical professionals and their families to help them live richer lives through smarter money moves during life and business transitions.
Steve’s practice includes the areas of retirement planning, low-cost index investment strategies, divorce, college funding and asset protection for business owners and professionals.
Steve frequently writes and presents on these topics. For more information on these topics, please go to his Linked In profile at http://www.linkedin.com/in/stevestanganelli or his blog at http://www.moneylinkpro.wordpress.com.
Article Source: Pay For College Without Busting Your Retirement Nest Egg
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Asset allocation is crucial for the upkeep of one’s wealth. It starts with the intention of creating a well-diversified portfolio and consists of dividing the investments with foresight among several different categories of all assets such as real estate, stocks, bonds, and cash. To increase wealth, all the categories have one precept in common, Buy low; sell high. To keep the wealth, however, one will need to diversify wisely.
Stocks are the most volatile of all the categories with unbearable losses at times, but they may also offer the highest returns. Picking diverse groups of stocks may somewhat limit the losses, although this may mean sacrificing big gains. Bonds still offer good returns even if not as high as stocks, but they may be slightly safer. Cash and cash equivalents of savings are savings accounts, certificates of deposits known as CDs, money market accounts, and Treasurys that come as bills, bonds, and notes, according to the time frames they are issued in. Unless inflation is in the horizon, with cash and cash equivalents, the nest egg will not lose its value, but it will not gain much either.
Asset allocation depends first on the projected time left in one’s life, in ratio to risk toleration. This is measured by the years left to retirement and the earning and saving ability in those years. For example, if a person has about thirty years to retirement, he may be able to take more risks, since the money making ability and keeping on building a nest egg will be there until retirement. On the other hand, another person retiring in two years will need to reduce the risks while distributing his assets for maximum return.
Second, adjusting and readjusting the assets to the markets of asset categories are also important. During the height of the real estate boom, people who bought highly expensive condos and other real estate lost a lot of wealth when the bust suddenly came about. Then, those who put their entire wealth in stocks lost a lot when a crash or a recession occurred.
If one portion of the portfolio grows much faster or loses more than others, some investors prefer to rebalance by selling off investments in bulkier assets and using that money for their other low-keyed but safer assets and for purchasing new investments. If the investor can make continuous contributions to his portfolio, he may also consider shifting the weight of his investments from heavier to lighter portions to provide a balance that would protect him against future risks. Reevaluating one’s investment at least once every quarter is good practice. While doing that, it is also important to take into account the transaction fees and tax consequences.
Once serious investment strategies take hold, the investor may want to acquire the services of a financial professional or group. Even then, the investor should keep on top of what is happening with his savings and investments through publications and serious websites. Should a problem occur with a financial professional, Securities and Exchange commission’s Complaint Center can be brought in to help.
To sum up, determining one’s long-term goals, knowing the specific categories to invest in, measuring the risk-versus-gain ratios correctly, and being ready to revise and reallocate the investment plan will succeed in the accumulation and protection of overall wealth.
This article has been submitted by Joy Cagil in affiliation with http://www.StockBee.Com/ which is a free online stock ticker quiz.
Article Source: The Ultimate Protection Against the Loss of The Nest Egg – Asset Allocation
Health Savings Accounts (HSAs) combine lower cost premiums, higher deductibles, and a tax favored savings account. With an HSA you get a tax deduction on the money that you put into the HSA account and your money grows tax deferred in your account. You spend the savings, tax free to help pay your deductible or to pay for qualified medical care (which often includes prescriptions, vision, and dental care).
The money that is not used at the end of the year will continue to accumulate over the years. With many HSAs, you will earn interest on your savings beginning with the first dollar deposited. Clients that may be interested in HSAs are those who want more control over how their healthcare dollars are spent; families interested in one calendar year deductible per family; and those interested in trading low deductible health insurance for a higher deductible plan to save money on premiums and taxes. Below is some basic HSA tax information:
- Eligibility - Those covered by a qualified high deductible health insurance plan and are not covered by any other health insurance or enrolled in Medicare, and cannot be declared a dependent on another person’s tax return.
- HSA Contributions – 100% tax deductible from gross income.
- Qualified Medical Withdraws – Tax Free.
- Interest Earned – Tax deferred; if used for qualified medical expenses; tax free
- Non-Medical Withdraws – Income Tax + 10% penalty tax (under age 65); income tax only (for age 65 and older).
- Death, Disability – Income Tax only – no penalty.
High deductible plans usually accompany the HSA. This is the actual major medical insurance that the client purchases. As a health insurance agent you want to make sure a high deductible plan and HSA is appropriate for your clients. Be sure to explain all of the tax implications and deductibles with your clients.
Those who may benefit from a high deductible plan are those who are willing to take financial responsibility for routine healthcare expenses in exchange for a lower premium; those seeking lower cost protection from unexpected accidents and illness; and those who retire early and need a bridge to Medicare.
Health insurance agents may also want to consider Short-Term coverage to bridge client’s gap in health insurance coverage. These types of plans are becoming more popular and you can create a niche in your business by locating clients with this need. Good candidates for this type of insurance are those who:
- Recently lost coverage due to a job loss
- Are students no longer eligible for coverage under their parent’s plan
- Are seasonal workers
- Retired and are waiting Medicare eligibility
Get more information about niche markets and increase your sales: healthinsuranceagenthelper.com
Article Source: Find Your Niche Through Health Savings Accounts
The philosophy of planning for the future has always confounded me. It seems to me there are two very basic world views in conflict when this issue is raised. One world view is the responsible response: the “planning for the future” type of person. This type of person seems to think he will live to be at least 100 years old, and that everything he refrains from enjoying, doing, or buying now will pay off as millions of dollars in that inevitable and very real place called the future.
Then there is that other sort of person that believes that nothing can be as wonderful as the fun that a person can have right now. Since I can’t “take it with me”, as they say, I might as well “eat, drink and be merry” right now.
I myself don’t adhere to either of these points of view. I have a tendency towards not missing opportunities today that might never come again, such as spending money, perhaps more than is wise, on a meaningful activity with my family which will become a wonderful memory to cherish for years to come. In many ways this type of spending is actually a type of investing; in the future of the health of my family. The relationships we develop with our loved ones must be worked on now, and not at some obscure future time. Remember Harry Chapin’s famous song “Cat’s Cradle?” This song illustrated the well-known “tomorrow” syndrome in a poignant and heartbreaking way. The mistake we all have a tendency to make when we tell our children “we’ll get together when I have time.”
Of course, on the other hand, quality time with our families does not always require large sums of money. Sometimes the inexpensive or free moments can be the best. But sometimes a really great time for everyone might require some money spent, and if so, sometimes it might be wise to say, “the future is now.”
Then again, if we are lucky, and we live a long time, long enough to retire and do some of the things we just couldn’t do when we were working 40 or more hours each week; when our children needed a lot of tending to and all the other things that get in the way of traveling, hobbies we love, enjoying long walks, or whatever it may be, it might be nice to have a bit of money to enjoy that time without worry.
So in conclusion it appears to me that the correct approach to this dilemma is to strive towards a responsible savings plan to ensure a worry-free and active retirement, while at the same time keeping our options open for some “irresponsible” spending today, while we still have our good health and our young children around to enjoy ourselves together with them. It is true you can’t take it with you, but it is also true that one day the future will be here and you will be happy that you were prepared and ready to meet it in style.
Emily Salisbury, the author of this article, writes about crafts, cooking, and home decorating. Her creative skills are far more developed than her financial skills, so she turns to professionals for investment advice.
Putting together a savings plan she could live with wasn’t easy, so Emily looked for a reliable investment adviser. Harry Rady of Rady Asset Management came highly recommended and helped her to make a plan that lets her enjoy her life now while planning for a secure retirement.
Article Source: Saving For the Future While You Enjoy the Present
These are not good economic times for a lot of people. And if you are near retirement or are already there, your ‘nest egg’ probably has diminished. Consequently your current (or projected) income level has dropped and the length of time it will last is reduced.
If your fund sources are in securities, no doubt the values have decreased. And when market conditions start to turn around (historically they have), how long will it take to get back to where you were before securities or other investment values headed south?
If you’re young enough and have the time for your investments to recover, hopefully you’ll be able to regain your losses and head back up a path of respectable returns on your investments. If you don’t have the time, you may be searching for ways to make up losses including cutting expenses.
There are a number of financial products at your disposal to consider. Stocks, mutual funds (both of which over a period of time generally do perform well), bonds, precious metals and even real estate (although now is not the best of times), and numerous other options. Certificate of Deposits (CD’s) and money market vehicles may not provide much of a gain, but they are very popular and have their place in overall planning.
Another option to review is an annuity. These plans include variable or indexed annuities which have become popular as accumulation vehicles with options to withdraw money for retirement purposes. Both of these types of plans have the potential for gains or losses but also have features that can protect downside risk. Results are tied into various security options or indexes. Fixed annuities provide a return based on the investment results of the general account of the insurance company issuing the policy.
One annuity product that may be considered to some as being ‘ho-hum’ or ‘boring’ is the Single Premium Immediate Annuity (SPIA). The boring part is that there is generally no potential for increases in value, no access to cash values, and no increases in the levels of income it provides.*
However, what is not boring is that the income received from a SPIA has guaranteed life time income options (or for a specified period of time) for individuals or for two people under a joint income annuity. And if an individual (or even two people under a join annuity) have serious health issues, many insurance companies will actually increase the normal level of income compared to what a healthy person would have received.
So who might consider this type of an annuity? Anyone who wants or needs a guaranteed income in addition to their monthly check from Social Security or other income sources they may receive. The SPIA may be the ‘bond’ vehicle in a total portfolio of mixed investments. Depending on age and personal financial goals, some advisors may suggest 10% to 20% of investments used for retirement income might come from a SPIA. Each situation will be different and requires a review of personal goals, obligations, and other financial considerations. Longevity should also be considered.
Another feature of SPIA income is that due to a special formula called an ‘exclusion ratio’, federal income tax due on the income received can be less (over a number of years) than other types of investment income. This special tax treatment applied to money received from non-qualified money sources, not qualified funds (i.e. pension type plans).
We’re all getting older and generally living longer. One concern may be that of outliving your money. Another is the cost of long term care which many of us will require sometime in our lives. For a 65 year old retiring today, its estimated there will be an additional cost of $250,000 for health services needed over and above any benefit plans we may have in place, either personally owned or provided by the government.
Current Nursing Home care in North Carolina is $5,569 per month for a private room (and doesn’t included drugs and other incidentals). An Assisted Living facility (private room) is $2,395 per month. Most people, if in fairly good physical and mental health, would prefer to stay at home. If assistance is required, an un-certified aide’s fee is $18.00 per hour for their service. (Source: Genworth Financial 2008 Financial Cost of Care Survey)
These costs are increasing higher than the national inflation rate. If a family member or friend is going to assist at home, the cost of lost wages and their own well being can be greatly affected. Purchasing Long Term Care insurance while healthy is a good option to help pay for a major part of long term care expenses. These costs can run into many thousands of dollars (and that could be from your retirement/investment money).
A Single Premium Immediate Annuity (SPIA) can also be an option to pay for Long Term Care insurance premiums. A one time single premium is paid which equals the income level required to pay for the Long Term Care insurance premiums. ** For example, if two spouses each own a Long Term Care insurance policy (and are joint annuitants under one SPIA), and one of the spouses die before the need for long term care occurs, the addition income from the annuity (required to pay for the deceased Long Term Care insurance policy) is now available for other uses to the surviving spouse.
What ever type of saving vehicles you might be using for accumulation or income purposes, diversification of investment choices will generally be important, particular in today’s volatile markets. A Single Premium Immediate Annuity is an option to consider when guaranteed income is needed. And actuarially, people live longer who receive guaranteed income from annuities. What Will Rogers said in the 1930’s still applies considering today’s investment atmosphere. “I’m not so much interested in the return ON my money as I am in the return OF my money.” A SPIA may be the right option.
*Some companies offer SPIA’s with access to values and increased income levels.
** Long Term Care insurance premiums may be subject to future increase.
Article Source: Has Your Nest Egg Cracked?
We all know that we should save money. But something so easy to say can be quite difficult to actually do.
Saving money is the basis of building your financial future. However, many consumers are putting it off one more day. Those days turn quickly into years of lost money. Without savings, the chances of meeting long-term financial goals and achieving financial security are quite miniscule.
In order to save money, you have to control your finances. Saving has nothing to do with how much you make. It has everything to do with how you control your money. If you have lots of credit card debt and live paycheck to paycheck, you are not in control of your money. And you aren’t saving for the future either.
You have to spend less and save more. The two are tied together. In order to save, you have to start spending less.
And it all really isn’t that difficult if you just start doing it.
First, sit down and write down your financial goals. Just ask yourself what you want from your money. Perhaps you would like to have a down payment for your first home. Maybe you need a new car. Make long-term goals, such as retirement, and short-term goals, such as new living room furniture.
Give each goal a dollar amount and a time frame. In order to save, you have to know what you are saving for. You have to have a reason to put your money aside.
You will need to set up a separate savings account. You probably know that leaving the money in your checking simply won’t work — you will spend it. Have a savings account that you can easily deposit or transfer money into. Many banks will set up an automatic withdrawal to your savings each month. This is a easy way to set it and forget it. It is paid just like any other bill.
Over time, you will see your money start to grow. This is rewarding and exciting. Most people become motivated to save even more. Saving and investing can become addicting in a good way.
You will find that a written budget is almost essential for saving money. You need to know where your money is going in order to make changes to the way you spend. A budget not only tells you where you are spending, but it can help you plan how you spend. Include into your budget a debt reduction plan, and your budget will make the most of your dollars. Budgeting is simple and doesn’t require you to sacrifice your entire lifestyle. It is just a plan to get where you are going.
If you do have a lot of credit card debt, you should focus spending your saving money on eliminating that debt. It would be wise to put a small amount aside for emergencies, but the vast majority of the money you are saving right now needs to be going to your debt. The reason why is simple. Why pay 20% interest on a credit card debt when your savings are earning 2% to 10% in interest. You are spending more than necessary. Wipe out that credit card debt first. It will save you more in the long run.
A lot of people really boost their savings by putting their unexpected money into their savings accounts. Your bonuses, raises, tax refunds and overtime can really pump up your savings. You aren’t having to spend even less or cut back more, but you are seeing your account balance rise.
There is no real secret to saving money. You simply have to start doing it. That is often the hardest thing — the first step. But once you see your finances begin to change and the interest start working for you, you will be hooked on saving for your future.
Martin Lukac represents RateTake.com Mortgage mortgage marketplace. RateTake matches consumers with multiple lenders offering low mortgage rates from our network of accredited lenders.
Article Source: Saving For Your Future
Money is a critical component in every person’s life. The handling of money requires delicate care because there are just too many demands in our lives that require us to part with money, but the fact is we have a limited amount of it. The measure of your financial success lies in your ability to save. Saving enables wealth accumulation and thus, the ability to enjoy a better lifestyle. Money savings tips are abundant. What may be challenging is to apply them diligently. Described below are ways to enhance your money saving plans and build your wealth nest.
Differentiate “need” and “want” clearly. Many people mistake a want for a need and the consequences are often obvious; they claim not knowing where their money went at the end of the day. Yes, you will need food; but do you need to indulge in that expensive steak? Allocate a monthly amount to save aside. Assume that this saving is your future investment and should never be moved unless of emergency. Again, what constitutes emergency varies form one person to another. Essentially, you need high self-discipline to do well in managing your savings.
You should also practice prudent shopping, creating a shopping list to prevent impulse purchases. With the abundance of healthy food choice available, there is no excuse for you to consume unhealthy food products because you can get better choices with the same amount of money. Learn to cut back on convenience products- they are just depleting your financial resources without a real cause. When shopping, always care to find out the price of products and make comparison. You can also learn to challenge yourself to create your own gifts and DIY products.
These money saving tips are basic ideas. You should cultivate a healthy money saving habit to enable you to live a healthier and better lifestyle.
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Article Source: Money Saving Tips For a Better Future
If you are one of the millions of people who has seen a sharp decline in the value of your retirement account, then you may be faced with the prospect of a retirement lost.
What do you do now? Do you keep working beyond your planned retirement date, in order to rebuild your nest egg? Or do you cash out whatever value you have remaining and try to stretch your retirement dollars for as long as you can?
What you can do is build up a new source of passive income that will make up for the shortfall in the funds you need for your retirement. Lost value doesn’t mean lost opportunity.
What you can do now is start earning passive income via the Internet. You don’t need to be a computer geek or a tech-savvy person. You don’t need to have web-design skills, an MBA, or even a business background. You don’t even need any money to get started.
All you need is a computer with Internet access. That’s it. Even a bum off the street can do it. All you need to do is spend an hour or two online every day, and you can be making hundreds, thousands, tens of thousands, or even hundreds of thousands of dollars every single month.
Billions of dollars are exchanging hands on the Internet by millions of people each and every single day. As an affiliate marketer, you can join the ranks of people who make their living by earning commissions for referring people to buy products on the Internet.
Regardless of how much your funds for retirement lost as a result of the economic crisis of 2008, you can rebuild that lost value in just a few short months or years, using passive money that you earn via the Internet.
It’s time to recession-proof your income! Whether you’ve been recently laid off or you are looking to generate an alternate source of income in the midst of this economic downturn, Internet marketing continues to be a thriving, lucrative source of income for hundreds of thousands of individuals and families world-wide.
Article Source: Retirement Lost – How to Rebuild Your Retirement Nest Egg
When the market goes up, it might be too expensive. When the market goes down it might go lower. The harder you try to figure out market timing, the more confused you are likely to become. And looking back in time is always easier than looking ahead.
Regular Savings Plan
When looking for a company that will help you save for your future becomes a difficult and time-consuming task, a trusted and reliable fund management company comes to the rescue. You may have not noticed it, but such company is actually accessible and you don’t really have to spend so much time, money and effort just to find the suitable one. An established company or that which has gained a reputation in the investment market is not that hard to find. All you need is the right and basic knowledge to do business with them and in order for you to get started with your savings plan. Be sure to look for one that lets you beat the clock.
How it Works
You will of course start with the basics. You can begin by putting aside a regular amount each month and then see what happens. Try to analyze the outcome or the results of your investments. Now, when your fund goes up, you win. You may ask why? It is because you are actually making money when the fund goes up. But what if the opposite happens? Well, the situation would be this, if your fund goes down, your regular contribution buys more shares in the fund, thereby putting you in an even better position to benefit when the funds moves back up again. What’s good about this is that either way, you will still benefit over the longer term.
Market Timing
Now you have to keep in mind to leave market timing to gamblers and speculators. The best thing to do is to join the smart investors who put their money each month into a regular savings plan with a stable company. So another thing that you need to consider to learn how this magic works is for you to speak to your investment adviser or bank. When you are settled with your investments, don’t be surprised to know if the value of your units may go down as well as up. The truth is, past performance is not necessarily a guide to the future. You should quite expect and know that the price of shares in the funds and income from a fund management company normally may go down as well as up.
With a low minimum initial investment of just $1,000USD, and minimum monthly payments of $100USD, additions to accumulating accounts can be through automatic payments or by cheque. Anybody can afford it, indeed savings plans are particularly flexible, allowing people or willing customers to add more or less along the way. Some companies’ mutual funds have no restrictions on the frequency with which people add to their investment or the amount of monthly contributions over the minimum. Investors in the savings plan also get a monthly statement, so they can follow the progress of their investment. GP
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Article Source: Saving For the Future – The Right Time is Always Now
Having children isn’t cheap these days, especially in the long term – the older they get, the more they cost. Higher education prices continue to soar and it’s almost impossible to get onto the housing market without having some capital or homeowner loans. All of these things may seem so far ahead, especially if your child is very young, but now’s the time to start saving to ensure you can provide what your children need further down the line.
Surveys suggest that we’re starting to realise this. A report published by Mintel in October 2005 found that 75% of British parents with children under 14 are now saving for their children’s futures. Nearly six million parents are now saving for their children, compared to just under five million in 2003. So it’s evident that we understand the need to save, but it’s not always easy to do so. The day-to-day family finances can be difficult enough to manage without having to think about the future. This article provides some information on how to save for children and explains some of the financial products available.
Bank accounts
The first step that most parents take towards saving for their children is to open a savings account on their behalf and start making cash deposits. Most banks and building societies have accounts specially tailored for children. They often have a higher rate of interest and offer incentives such as membership of a kids’ savings club with regular newsletters, piggy banks, toys and badges. Even if you’re not sure how often you’ll be able to make deposits into the account, it’s a good idea to set one up as soon as possible after your child is born so that it’s there whenever you do have money to put aside. Try to get into the habit of putting in at least a small amount on a regular basis – setting up an automatic transfer from your bank account will make this much easier. Alternatively, simply depositing the government child benefit on a weekly basis will get you off to a good start – it’s amazing how quickly it builds up.
Tax
Children are subject to income tax on bank accounts just like adults. They receive a tax allowance and as long as their total income including interest doesn’t exceed this allowance in the financial year, they will not be taxed on their interest. (The allowance for 2006-2007 s £5,035.) However, this only applies when the savings are gifted by a relative or friend. Interest on money gifted by parents will be subject to tax if the amount of interest earned in a year exceeds £100 per parent. (This prevents parents from taking advantage of children’s accounts for their own savings.) If your child’s annual income will be less than their tax allowance and the money you give them in a year will amount to less than £100 in interest, you can fill out an R85 form from the Inland Revenue to apply to have the interest paid without tax being deducted. It may be worth opening separate bank accounts if your child will be receiving money from yourself as well as relatives or friends, to save any confusion.
Child trust funds
The introduction of child trust fund by the government in 2005 has made a big difference in helping parents to save for their children. In the scheme, new parents are given a minimum of £250 to invest in a long-term savings and investment account on their children’s behalf, plus a further £250 when the child turns seven. The proceeds are held in trust for them until their 18th birthday. It’s not subject to tax and up to £1,200 can be invested each year by parents, family or friends.
There are three types of account – a savings account, a shares account and a stakeholder account. The choice you make will depend to a great extent on your attitude towards risk. Savings accounts are the safest method as you won’t lose money this way, but the returns on the investment tend not to be very high.
The shares account invest your child’s money by purchasing stock market shares. Investing in shares can be risky, especially in the short term, although on the whole the stock market can produce a good long-term returns as share values tend to rise more than they fall over a long period. As saving for children is normally a long-term approach, shares accounts can be an attractive option. However, shares can go down as well as up at any time and past performance isn’t necessarily an indicator of future performance. It’s also important to note that the account provider will normally charge an annual fee for managing the shares.
The stakeholder account is a medium risk option, which invests in shares until the child turns 13 and then the money is transferred to lower risk investments and assets, helping to limit potential losses in the lead-up to the child’s 18th birthday. However, if the stock market performs well over this period, the returns won’t be as high as they would have been if the money had remained in the higher risk investments.
You’ll need to choose not only which account you want for your child, but also which provider. Various different banks, buildings societies and financial organisations provide approved child trust fund accounts. The government simply sends you a voucher for £250, which you’ll invest in the account and provider of your choice. All providers are of course regulated and must meet the terms and conditions stipulated by the government. However, there may be differences in the products they offer. Look out for fees charged and any requirements relating to how much you deposit and how frequently.
Other government-backed savings options
The National Savings and Investments Bank (formerly the Post Office Bank) is an agency of the Chancellor of the Exchequer. It was set up in 1861 by the Palmerston Government to help working people save for their futures and as a means of raising government funds for public spending. It offers various safe and secure options for saving. Premium Bonds, for example, are a monthly large-value prize draw in which you can enter anything from £100 to £30,000. The jackpot can be up to £1million, but prizes of between £50,000 and £100,000 can be won for every bond number held. The prizes are tax-free and bonds can be bought by parents, relatives or friends on behalf of children under 16. Alternatively, indexed linked savings certificates are a great method of tax-free saving in which the value of your money increases in line with inflation (linked to the Retail Prices Index) at guaranteed interest rates. Between £100 and £15,000 can be invested per issue, and they are available to anyone over the age of seven (or can be bought on a child’s behalf if they are under seven).
There are lots of other possibilities for saving for your children – investments, stocks and shares, bonds, savings accounts, trust funds – not all of which are specifically designed for children. In such cases, you’ll need to manage the money on the child’s behalf until they reach 18 (or sometimes 21). To find out how you can best provide for your child’s future, you should visit a financial advisor who will be able to outline the most suitable options for you and your family.
Benedict Rohan works as a freelance finance writer. Commercial Mortgage, Homeowner Loans, Remortgages
Article Source: Saving For Your Child’s Future