As the Chuseok holiday approaches, many parents are contemplating how to manage the allowance their children receive. Instead of spending the money received during holidays, parents can encourage their children to save it in an account under their name, fostering good financial habits while also laying the groundwork for future savings.
The first step is to open a separate account in the child's name. In the past, parents had to visit a bank branch to set up an account for their minor children, but now, accounts can be opened online through banking or securities apps. Financial institutions verify the parent's identity and legal guardianship, as well as the child's real name, before opening the account. However, the requirements and documentation needed may vary by institution.
If the child is young or if parents want to avoid any risk of principal loss, a savings account or time deposit is the simplest option. Instead of leaving the holiday allowance in a checking account, parents can transfer a set amount to a time deposit or divide it into monthly contributions to a savings account. There are also products that offer preferential interest rates for child and youth customers, so it is important to compare the base rates, preferential conditions, and contribution limits before signing up.
If parents can invest for the long term, they might consider using a securities account. After opening a securities account in the child's name, they can accumulate holiday allowances to invest in stocks or exchange-traded funds (ETFs). However, unlike savings accounts, there is a risk of principal loss, so it is advisable to avoid using funds needed for short-term expenses like education or tutoring. Involving the child in selecting investment targets and tracking returns can also provide valuable financial education.
It is important to be aware of tax implications. Not all money deposited into a child's account is subject to gift tax, but simply labeling it as 'allowance' does not automatically exempt it from taxation.
Under current tax law, minors receiving gifts from direct ancestors, such as parents, can receive up to 20 million won tax-free over a ten-year period. After reaching adulthood, they can receive up to 50 million won tax-free for gifts from direct ancestors over the same period. Therefore, if parents plan to transfer a significant amount of money to their children, it is wise to consider past gift records as well.
Particularly, if money sent by parents is deposited into savings accounts or used for stock investments, it should be distinguished from regular living expenses. The National Tax Service recognizes living expenses or educational costs that are socially accepted as non-taxable, but money received under the same name that is used for savings or investments is not considered non-taxable living expenses.
However, there is no need to worry about gift tax for small amounts of allowance exchanged during holidays. The National Tax Service clarifies that the claim that small transfers between family members are uniformly subject to gift tax is not true. Ultimately, the amount, purpose of the transfer, and actual use will be considered collectively.
Experts advise that to turn children's allowances into significant savings, it is crucial to manage the funds separately. Instead of keeping the money in a parent’s account and withdrawing it as needed, parents should create an account in the child's name to consistently save holiday allowances and regular allowances, while keeping a record of deposits.
While 50,000 or 100,000 won received during holidays may not seem like a large sum, developing the habit of saving money received repeatedly during holidays like Chuseok, Lunar New Year, and birthdays can lead to significant differences over time. This Chuseok, instead of simply handing over cash, consider opening a 'first bank account' together with your child as a starting point for financial education on saving and managing money.
* This article has been translated by AI.
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