How to Invest for Your Kids' Future: A Parent's Guide

Short answer

If you want to build a nest egg for your child, the simplest and most tax-friendly option for most Australian families is an investment bond (also called an insurance bond). Earnings are taxed at a maximum of 30% inside the bond — well below most parents' marginal tax rates — and if you hold it for 10 years or more while sticking to the contribution limits, you pay zero tax when you withdraw.

If you prefer to pick your own shares or ETFs, a minor trust gives you that control, but comes with more paperwork and harsher tax rules you'll need to watch closely.

Why bother investing for your kids?

Think about what $10,000 invested when your child is born could look like by the time they turn 21. At a 7% annual return (roughly what Australian shares have delivered over the long term), that grows to about $41,000 — without adding a single extra dollar. Add $100 a month and you're looking at over $100,000.

Whether it's for university, a first car, a house deposit, or just giving them options, an early start is the most powerful thing you can give them after your love and attention.

Option 1: Investment bonds — the set-and-forget choice

Investment bonds are a type of managed fund designed specifically for long-term saving. Here's how they work:

• You invest a lump sum or regular contributions
• Earnings inside the bond are taxed at up to 30% (the company tax rate)
• After 10 years, all withdrawals are tax-free — you don't even need to include them on your tax return
• The "125% rule" lets you increase contributions each year without resetting the 10-year clock: each year you can contribute up to 125% of the previous year's contributions

The catch? If you withdraw before 10 years, you pay tax on the earnings at your marginal rate (minus a 30% offset for tax already paid inside the bond). So this is genuinely a long-term play.

Popular providers in Australia include Australian Unity, AMP, and IOOF. Most offer a range of investment options from conservative to high-growth, and you can usually start with as little as $500.

Option 2: Minor trusts — more control, more admin

A minor trust lets you invest in shares, ETFs, or managed funds on behalf of your child. You (or another adult) act as trustee until the child turns 18 (or an age you set, like 25).

The big advantage: you choose exactly what to invest in. Want a simple ASX 200 ETF? Done. Prefer a mix of Australian and international shares? Go ahead.

The downside: tax. Here's where it gets painful:

• Children under 18 pay no tax on the first $416 of unearned income per year
• From $417 to $1,307, they pay 66% on the excess over $416
• Above $1,307, it's 45% on the whole amount

These are the "penalty tax rates" for minors, and they apply to dividends, distributions, and interest — basically anything that isn't employment income. A modest ETF portfolio paying $2,000 in annual dividends could leave your child with a tax bill of over $700.

There's also paperwork: you'll need a TFN for the trust, lodge annual tax returns, and keep records of everything.

Option 3: Invest in your own name

The simplest of all: just invest in your own name and mentally earmark it for your kids. No trust deed, no special account, no penalty tax rates.

The downside? The income is taxed at your marginal rate (which could be 32.5%, 37%, or 45%). And when you eventually give the money to your child, there's no CGT event — but you do need to actually hand it over, which requires discipline.

This approach works well if you're in a lower tax bracket or you're investing smaller amounts where the tax difference isn't material.

Option 4: High-interest kids' savings accounts

For short-term saving or smaller amounts, a kids' high-interest savings account with no fees is a solid first step. Many Australian banks offer special rates for children's accounts — sometimes higher than adult rates.

The tax treatment is friendlier too: if your child quotes their TFN and earns under $416 in interest, there's no tax to pay. For a child with $5,000 earning 4.5%, that's $225 in interest — comfortably under the threshold.

But be realistic: at current rates, a savings account alone won't build serious wealth over 18 years. It's a great starting point, not the whole plan.

How the options compare

How much should you invest?

There's no magic number. But here's a way to think about it:

Even $50 a month — the cost of two takeaway coffees a week — compounds into something meaningful. The key is starting, not the amount.

The one tax trap every parent should know

If you invest directly in a child's name (not through a bond or trust), the ATO's penalty tax rates for minors kick in fast. A child can have a share portfolio worth $15,000–$20,000 paying maybe $600–$800 in dividends before they blow through the $416 threshold.

That's why most financial advisers in Australia recommend either investment bonds or holding assets in the parents' name until the child is older.

What I do for my own kids

As a CPA and a mum, I keep it simple. A small monthly direct debit into an investment bond, set to the high-growth option, and I don't think about it. My kids are young, so time is on our side. The 10-year rule means by the time they're teenagers, withdrawals will be tax-free — and that's when big expenses like school trips, first cars, and university start appearing.

Is it the most optimised strategy on paper? Probably not. But it's the one I actually stick with, and that matters more than perfection.

What matters most is starting. Pick the option that feels doable for your family right now, set up an automatic transfer, and let time do the heavy lifting.