How to choose the best investments for children

Investors sometimes ask us how to select the best investments for young children. If children are under the age of 18, they cannot yet invest as adults. However, there are a couple of savings and investment options available.

The first option is for you (or the child) to open a bank account in the child’s name. Interest paid on small balances may range from zero to, say, 0.75% annually, paid monthly. All of the major banks have special bank accounts for children, usually without service fees on basic transactions. However, once the child has accumulated $500, he or she could move the money into an interest-paying guaranteed investment certificate (GIC).

In-trust accounts offer low cost, flexibility

If you want to build up an investment portfolio for a child, then an informal in-trust account is a low-cost and flexible option. (Investments or investment accounts in the name of a child must be set up in trust because minors are not allowed to enter into binding financial contracts.) An adult must be responsible for providing the investment instructions and signing the contract on the child’s behalf.

"Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada": In this special report, Pat McKeough gives you his time-tested advice on how you can make more money from your investments and save thousands on brokers' fees and other expenses. Best of all, you can get a copy absolutely FREE. Click here to claim yours now.

An informal in-trust account has a donor (or “settlor”) who contributes funds to the trust. The trustee is the person in charge of the account, and is responsible for managing the funds for the child (the “beneficiary”). The settlor should not act as the trustee. The settlor’s spouse can be a trustee, however.

The money belongs to the child, but only the trustee can make withdrawals if the child is under the age of 18. Once the child reaches 18, the money is theirs to do with as they wish.

Focus on capital gains to find the best investments for a child’s stock portfolio

Interest and dividend income earned in an in-trust account is attributed to the contributor until the child turns 18, unless the contributor is not related to the child. However, all realized capital gains are directly attributable to the child. So it’s best to downplay investments that mainly provide interest or dividends, and instead hold stocks or mutual funds that will earn capital gains.

(Our latest free report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada,” includes all you need to know to set up an investment portfolio. The report also includes strategies you can use to select the best investments for your financial goals. Click here to download your copy and get started right away.)

Secondary income, or income earned on income from investments in the trust, will be taxed in the hands of the child. All income earned on Canada Child Tax Benefit payments put into the account is taxed in the hands of the child, without attribution to the contributor.

Exchange-traded funds are among the best investments for a child’s investment account

With the first contributions to the in-trust account, exchange-traded funds are some of the best investments to choose as a starting point. If you start out in exchange-traded funds, we recommend putting two-thirds of your contributions into a Canadian exchange-traded fund and the remaining third into a U.S. exchange-traded fund.

However, there’s nothing wrong with buying individual stocks with smaller sums, say under $12,000. You just have to accept a bigger proportional commission expense when you get started. To further cut your commission costs, consider buying the shares through a discount broker, rather than a full-service broker. That’s because discounters generally charge much lower minimum commissions.

As a member of TSI Network, you may have already seen Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada. If you haven’t yet read this new free report, click here to download your copy today. I’d also encourage you to share the report with a friend by forwarding this email to them. It’s my “thank you” just for signing up for my free daily updates.