Part 2 - SmartShares for Kids!
Sep 3, 2017
If you would prefer to listen to me read this blog post, please click on the play button.
Last week I wrote about how I had moved my daughter's investment from an ANZ Managed Fund to SmartShares. I was pretty happy with my decision. I made the change, after careful consideration, for a couple of reasons. Firstly even though the fund was performing well the fees were really high and over the next ten years they were going to erode her returns. Plus I had lost track of where the fund was located and it was difficult for me to find out what its balance was etc so I wanted to have it closer to hand. The more I read about Index Funds, the more I understand and the more comfortable I feel about investing in them over the long term.
After I had made the switch I received a number of comments from my super clever subscribers and they said I had made a bit of an ERROR in going with SmartShares instead of SuperLife for my daughter. The main reason they pointed out was due to that crazy and complex word... TAX. They pointed out that because I am bringing her under my own SmartShares “umbrella” then she will pay the same tax rate as me, which as it turns out is 28%, not the 17.5% rate I originally thought was my rate. SmartShares rate is set at 28%, whereas with Superlife you can choose between 10.5%, 17.5% or 28%, dependent on your income. If I were to sign her up with SuperLife she would pay only 10.5%.
Now I have a problem. I had made my decision, filled out the correct paperwork, it’s all good to go! I don’t want to have to go back and review it again and I feel like the school kid that really does NOT want to do their homework but nonetheless I kinda had to. Sigh. But that is LAZY of me as the point of this blog is to find out the answers to things so my readers can cut out hours of tedious research.
This had me up at 5am and on the internet working out the pro’s and con’s of what to do. At the end of the day I was trying to simplify things for my daughter by bringing her investment in under my own. She was with an ANZ Managed Fund that I had literally lost track of. I was receiving no updates on how it was performing etc, I had to phone them to find out anything about it which was a pain. Plus the fees of that fund were 1.37% as opposed to .50% with using SmartShares NZ Top 50.
Now I’ve spent a morning Googling, which usually I have a bit of fun doing, it is usually a bit of a sport. But not today. The investment industry has a HUGE problem with presenting information in a clear and concise manner if they want to attract newbie investors and I just got myself all annoyed with trying to compare my options.
Usually I’m a positive person but by 6am I was feeling grumpy.
I trawled the SuperLife site and my first thought was that their site sucks (despite all the glowing reports I had heard about the usability of it). I clicked on links that didn’t work and had to read, read and read SCREEDS of information.
Finally on page 21 of the 32 page Superlife Investment Product Disclosure Statement I came across the six page application form and finally found, on page five, the form for My Future Fund Application. This was followed by even more paperwork. Confused? So was I.
Too confusing. Too hard to find. As I expected, too much paperwork to fill out, requiring identification documents etc etc. It was everything I FEARED would happen when I set out to do my homework this morning!
I think the SmartShares web designers need to cross the office floor and give the SuperLife team a few design tips...
My one question I really needed an answer on was of course what tax would she be paying? By 'she' I actually mean "me" because although she has her name against these SmartShares I am the legal owner (as explained in the previous blog). After working on a numbers spreadsheet of my own (to my credit it actually worked quite well), you can imagine my relief when I found out that another FI guy Alpha had just written this: www.thesmartandlazy.com
Handily titled "Compare ETF Fund Cost Between SuperLife And SmartShares" he made my research a little easier.
I could have hugged him.
As luck would have it I heard from Dean from SmartShares during the week so I asked him about investing on behalf of children as well. It turns out that this conversation was actually pretty well timed because they are having some discussions in the office about the number of investors who are choosing to invest on behalf of their children and mokopuna and the various implications around this.
After a shite load of reading and consulting I came to my decision.
My daughter at this stage only has $3,000 to invest which I am drip feeding in over the coming three months. Then I’m putting in $50 per month going forward. When you are nine years old thats an ENORMOUS amount, you are practically a millionaire. But when you are an Index Fund that is DIDDLY SQUAT! The reality is that the difference between SmartShares and SuperLife and their differing tax rates is pocket change in the grand scheme of things. Alpha in his blog post worked out that if you invested $20,000 in the SmartShares and SuperLife US500 ETF the difference between the top tax rate of 28% and the lowest of 10.5% over that amount would be $145. Yes she will pay tax on the earnings/dividends she receives but with only $3,000 invested these earnings will be small in the early days, so the tax she pays will be smaller still. The difference between the two funds is not a great one and really it is about working out what is best for my situation.
I’m trying to simplify my investments and not have 10 different logins and passwords for 10 different investments and yet another tab on my beautiful spreadsheet. One of the main reasons I wanted to stick with SmartShares was so I didn’t have to sign up to yet another investment, filling out forms, sorting identification for verification and from today’s search that is exactly what I will be doing. With having her in with my SmartShares with me I can easily keep an eye on how she is doing and at ANY time I can change her to SuperLife if I want to, but if SmartShares are starting to have a think about investing for your kids and the tax you may pay, maybe I won’t have to?
It was as I originally talked about in my blog Analysis Paralysis. Just pick one and go for it. I picked SmartShares, I know how it works, it was easy to add my daughter to it. Yes, she is paying a higher tax rate, but in reality she has such a small sum invested at this point. So, tax benefits or no, I’m sticking with my original plan as I just can’t summon up the energy to change her over.
Having made my decision I know that there will be some in the FI community saying "but by not changing you are still losing money for goodness sake", something we are all trying to avoid. Coming across this paragraph in the bowels of a SmartShares legal document had me finally sure of my decision: "However, if you are currently paying tax at a rate less than 28%, the excess tax paid by a fund can be used to reduce the tax payable on the other income that you derive at the end of each income year by including the distributions from the fund in your tax return".
YIPEE!!!! My tax return is currently underway with an accountant and he will be applying this principle to my return so I'm going to get the dollars back anyway. Hoorah!!!! We can all relax.
To end. Like the kid who does not want to do their homework, I got there in the end and I actually learned something too! I learned more than I knew before about tax and although I 100% get what people were saying when they emailed me with their comments (which I REALLY appreciated) I’ve weighed up all the pro’s and con’s and am happy with my original decision. I may change in the future and I will certainly keep reassessing over the years but for now I’m all good, and so is my daughter. And that is what you have to do when you invest, whether you are starting out with $500 or investing $100,000. Weigh up your options, research your options, ask around, but then ultimately you have to pick a path and go with it.
After all that Googling, my brain is tired. I’m off outside for a run in the fresh air instead.
