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.