Minting a Child Millionaire Step 1: Open an Investment Account with a Discount Broker

Don’t be frightened by this. It’s easy.

 

In order to make any sort of non-cash investment – i.e. shares, funds, bonds etc – you need to have a ‘brokerage account,’ which is simply an account with a financial institution that allows you to deposit cash into it via electronic transfer and to place purchase orders on global stock markets.

 

‘Discount broker’ refers to brokerages – companies that provide share / stock dealing – that don’t provide investment advice and often don’t charge annual maintenance fees and thus are much cheaper and better for the do-it-yourself investor. You want a discount brokerage account for the Child Millionaire portfolio.

 

Most people fail to take this first step, which is the most time consuming part of setting up a Child Millionaire portfolio in that it will take you an hour or two to organize. Do this NOW.

 

Most banks and dozens of investment companies offer brokerage accounts. What we want for the Child Millionaire portfolio is as follows:

 

1)      A low-cost ‘discount brokerage’ account, preferably one without any ongoing annual maintenance fees though it varies country to country whether you can find a no fee brokerage.

2)      Low commissions on purchases – look for commission charges under $20 / £15 per share/stock purchase transaction. Generally speaking US readers will get much lower rates than UK or Canadian readers.

3)      Look for a brokerage that allows you to purchase investments on global markets, not just your home country stock exchange, and generally avoid bank brokerages that only allow low-commissions on the bank’s own investment products.

4)      The brokerage account should allow you to make automatic monthly deposits from your bank account.

5)      The account must allow for automatic dividend reinvestment.

6)      Preferably the account is ‘tax-free,’ if allowed within your country.

 

Right now many of you are thinking that this is way too complicated and are losing the enthusiasm. Don’t give up. Opening the account is 90% of the battle.

 

In Canada and the UK I use TD Waterhouse as my broker (Canada: www.tdwaterhouse.ca and UK: www.tddirectinvesting.com, US: www.tdameritrade.com). However there are dozens of comparable brokerages.

 

The point is not to get bogged down by the baffling array of options. Simply choose a brokerage and get the account open. You can always switch brokerages later if you find a cheaper option.

 

You should be able to open the account in minutes though there might be some minor follow-up paperwork involving signatures, however the brokerage will tell you exactly what to do and send you the relevant documents.

 

Note that I receive no compensation from TD Waterhouse; I simply want to give you a one-click, low-effort solution to choosing a brokerage. TD’s fees are generally pretty low, though there may be cheaper options out there, so if you don’t want to do the research and feel your enthusiasm slipping, simply click on the applicable link above and start now. If you are from outside Canada, the UK or US, a quick web search for ‘discount brokers’ should get you started.

 

What’s in a Name?

 

A key issue is whose name should be on the account. Different countries have different rules on taxation on income generated by investments held for children. We don’t want to get bogged down in the detail here lest we lose the momentum to get the Child Millionaire portfolio off the launch pad. I’ll tackle some of the complexities of tax in later posts, however generally speaking your options are as follow depending on your country:

 

1) If permitted, set-up a tax-free account in your child’s name.

 

In the UK the new ‘Junior ISA’ allows investments to be held in a child’s name but the account is controlled by the parent and all investment income grows tax-free. Importantly, there is an annual limit of £3,600 that can be contributed by parents and once in the account, the money legally belongs to the child. Complete control over all money in the Junior ISA transfers to the child at age 18 and can be rolled into a normal tax-free ISA. Canada and the US do not currently offer tax-free options for children.

 

2) If there is no eligible tax-free account for children in your country then an ‘informal trust’ may be an option, provided it is allowed by your tax authority. Check to see whether the tax authority and brokerages allow for you to hold a brokerage account ‘in trust’ for your child.

 

In Canada, within ‘informal trust’ accounts, interest, dividend and foreign income remain taxable in the name of the parent while capital gains accrue to the child. Furthermore, tax is only payable by the contributor on income earned by ‘first generation money’ – i.e. money contributed by you not income earned on investment income. This can get complicated pretty fast once you start earning dividend income and requires detailed tracking of contributions and income.

 

3) Set-up a formal trust. In this case, the trustee (you or someone you appoint), controls the money, the account and can determine when, if ever, the money is transferred to your child. Trusts are eligible for forms of tax relief and are very flexible, however they are expensive and require expert legal advice to set-up and administer.

 

4) If neither option 1 nor option 2 is possible and option 3 is too complicated and costly, then the easiest solution is to open a brokerage account in your name, preferably using a tax-free shelter such as a UK ISA (this is how I hold Mia’s Child Millionaire portfolio), Canadian TFSA or US Roth IRA. Or you can simply use an existing investment account in your name and simply track the portion of the account that is devoted to the Child Millionaire portfolio.

 

For the purposes of getting you started, we are going to assume that you go with option 4 and simply open an account in your name but consider it privately to be for your child. If you already have a tax-free investment account with contribution room that you aren’t using then this is your best option. However bear in mind that if your child’s investments are mixed with your own in a single account then you will need to track them separately in a spreadsheet or ledger.

 

If your tax-free accounts have no further contribution room or such accounts aren’t available in your country, then you’ll need to open a regular discount brokerage account and report and pay tax on any investment income. In the case of the UK, tax will be automatically taken off by the financial institution.

 

If you are in the UK, consider a Junior ISA if you can find a brokerage that allows for stock/share purchases and dividend reinvestment within a Junior ISA account, and if you aren’t bothered by your child having control over their Child Millionaire portfolio at age 18.

 

Actions:

 

Don’t get discouraged or bogged down by the complexities of tax and the myriad options.

 

Research the lowest-cost brokerage account that allows for international share/stock dealing, regular contributions and cheap or free dividend reinvestment with the greatest tax advantage for your situation. Once you find the right brokerage open the account immediately. Once the account is open you are 90% of the way there.

 

Or, the lazy option:

 

Simply click on one of the links above for TD Waterhouse / TD Direct Investing / TD Ameritrade and open the account in your name and fine tune it for tax later.

 

Get to it!

 

Next: Step 2: (Near) Painless Funding of the Child Millionaire Portfolio

 

Or: Return to Minting a Child Millionaire in 2013 Step-by-Step Series Overview

 

 

 

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