Financial adviser Ben Nash worked with a couple in their 30s who wanted to get ahead and make some moves to help their kids out in the future. (Source: Ben Nash\/Getty) <\/p>\n
This couple were in their late 30\u2019s earning strong incomes, had two young children, and were finally past the expensive years of parental leave<\/a>. Cash was building again, but most of every extra dollar seemed to be disappearing to the ATO<\/a>. They wanted a smarter way to get ahead today<\/a>, and also make some moves to help their kids in the future.<\/p>\n For background, our couple had $50,000 in cash savings<\/a> they\u2019d built up over the last few years, and $100,000 in shares they\u2019d earned in their company. We walked through some options and started chatting about investment bonds.<\/p>\n They liked the idea of automating their investing<\/a>, reducing the tax on their investments and also wanted a clear way to fund a meaningful gift for their children without handing over cash too early.<\/p>\n RELATED<\/p>\n They sold down their company shares, added in their cash, and set up an investment bond to invest into low-cost index funds. Monthly savings were then automated into their bond so the progress didn\u2019t rely on their motivation or time input.<\/p>\n At the same time, they opened one bond for each of their children, with contributions aimed at a $250,000 target by age 21. They hoped it would allow their kids to fund a future home deposit<\/a>.<\/p>\n You can think of an investment bond as a long-term investment account with its own tax rules. The first key rule is that any investment earnings inside the bond aren\u2019t added to your personal income and don\u2019t attract personal tax rates of up to 47 per cent, instead they are taxed inside the bond at a maximum rate of 30 per cent.<\/p>\n And on top, if you hold your investments for 10 years or more, you don\u2019t pay any capital gains tax<\/a>, and withdrawals are generally tax free.<\/p>\n Our couple were both on high marginal tax rates after stepping back into full-time work. Investing outside a bond would mean most of their earnings would be taxed at 47 per cent, rather than the bond tax rate of 30 per cent. As their investments grew, this effective tax saving<\/a> of at least 17 per cent would grow to deliver significant dollar savings over time.<\/p>\n Flexibility was another thing that was important to them. A bond allows you to invest for your kids for the long-term, without waiting for retirement age to access the money. For their kids, they could set things up so the money was available to them for the set purpose at the time they wanted.<\/p>\n Our couple made an initial contribution to their bonds of $150,000, and set up a recurring transfer of $2,500 each month between their main bond and $500 monthly for each of the two kids’ bonds. Based on a return equal to the long-term Australian share market return of 9.8<\/a> per cent (5.8 per cent income, 4 per cent growth).<\/p>\n Outside a bond, these earnings would have been taxed at 47 per cent on income, and 23.5 per cent on gains (with the long-term investing 50 per cent CGT discount). Inside the bond, the income is taxed at 30 per cent, and 0 per cent on gains because they will hold the investments for 10 plus years.<\/p>\n With the amount they put into their bonds, the average invested balance over the first year was around $171,000. That resulted in around $9,900 of income, and $6,800 of gains. Based on this, the first year tax savings came in at around $3,300 \u2014 and the savings were only just getting started.<\/p>\n Looking over the next 10 years, based on the same investment contributions, and as returns compound, the tax saving gap starts to widen. By year 10 of the strategy, the annual tax savings<\/a> from investing in a bond compared to their personal names would be $13,600 in that year, and cumulative tax savings were roughly $82,000 in total tax saved. Looking over 20 and 30 years, the tax savings compound significantly more, adding $438,000 and $1.32 million, respectively, in total tax saved.<\/p>\n Another big upside of the results for our couple is that the bonds for their kids are expected to reach a total value of roughly $414,000 by the time the kids reach age 21, giving them a solid shot of entering the property market, even if prices keep running.<\/p>\n The core of this strategy was investing through bonds, but none of this would work if they were forced to sell investments at the wrong time. To make sure this didn\u2019t happen, we had a clear target for their emergency cash buffer, which was reviewed annually based on what was going on in their life and money to ensure the amounts remained right for them.<\/p>\n The second crucial part of their risk management was an annual review of their full strategy, to ensure this approach to investing through bonds continued to fit with the other things going on with their money, work situation and income, and plans around property investing and debt reduction. This process also reset savings targets and motivation to ensure the million dollars plus of tax savings were actually realised.<\/p>\n And throughout, they avoided one of the most common tax mistakes<\/a> from this tax saving strategy – treating a bond like a short-term parking space for money. If you expect to dip in and out, or not invest consistently, an investment bond may not be the right tool for you.<\/p>\n Before we got serious with planning for our couple, they were leaking tax and sitting on assets that didn\u2019t match their goals. But once they made nailing it with their money a priority, they capped their tax leakage, removed CGT altogether, and put their kids on track to much more comfortably enter the property market \u2014 and saved over $1.3 million in tax in the process.<\/p>\n This isn\u2019t a trick, it\u2019s a tax saving structure<\/a> that fits a household with a solid income and savings capacity, and the desire to keep their admin simple. Put the right tactics in place, automate your success, and let the system run, and you’ll keep more of what you have, earn today, and protect your compounding for tomorrow.<\/p>\n Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth<\/a>. Ben\u2019s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon<\/a> | Audiobook<\/a>.<\/p>\n If you want some help with your money and investing, Ben has created a free seven-day challenge<\/a> you can use to get more out of your money you can join here<\/a>.<\/p>\n Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.<\/p>\n Get the latest Yahoo Finance news – follow us on Facebook<\/a>, LinkedIn<\/a> and Instagram<\/a>.<\/p>\n An investment bond is a long term investment account with its own tax rules. (Source: Getty) <\/p>\n