What’s the best way to save for my kids?
Donna asks: I have two children — three and seven. I have been putting their Uccb (Universal child care benefit) money into their own bank accounts since they were born. We want to set up an investment account for each of them in their own name and invest the money in index funds for their future use — probably for education, but it could be for something else like a down payment on a house. My understanding is that the Uccb money is their money and earnings on that money will not be attributed back to the parents. How do we go about setting up an investment account for each of them in their own names? does it have to be joint with a parent? What are the tax implications? I don’t want the earnings to be attributed back to me. I don’t want to run into problems with crA.
Jason Heath responds: Parents are tasked with tough responsibilities for their children. It’s something I vaguely appreciated as a child and now appreciate tenfold in my role as a father. And financial responsibilities are no different.
So what’s the best way to save money for your children’s future?
donna saves the money from her children’s $100 monthly Uccb – a program that was put in place in the 2006 Federal budget for children aged 6 and under. She is correct that the money from these payments can be accumulated and invested in a child’s name, whether in a bank account or an investment account.
The tax on the investment income is technically attributable to the children and since in most provinces, a taxpayer can earn $10,000 a year or more depending on the source of income without being subject to tax, the tax implications are generally not applicable and do not require you to file a tax return for your child.
Investment accounts for children who are under the age of majority are commonly known as informal trust accounts — accounts that are administered by an adult until the kids are old enough to take over on their own. The “take over on their own” part is the key, in that these accounts technically belong to junior when they grow up.
Parents can establish formal trust accounts with a lawyer, enabling parents to maintain control of the accounts past the age of majority. but this comes at a cost of thousands of dollars up front and hundreds of dollars each year for filing tax returns for the trust (a separate entity for tax purposes with a special tax filing). So formal trusts generally only make sense when the up-front investment is fairly significant.
One of the classic savings vehicles for a child is that of a registered education Savings Plan or reSP. It’s an account that parents can contribute to and get 20% government grants as an added incentive. contribute $1,000 and get $200 from the government — an instant 20% return on your investment.
reSPs are meant to save for education and rules exist that require repayment of the government grants and punitive taxes on the tax-deferred growth if not used for schooling. So some people are reluctant to use reSPs to save for children’s futures due to the educational focus.
I disagree. Most children these days pursue some form of post-secondary education. college, university, trade school and other programs all around the world qualify for reSP withdrawals and 20% is a pretty nice instant return these days. Not to mention the pre-funding is an incentive for children to continue their education after high school.
registered disability Savings Plans (rdSPs) are good savings options for parents of disabled children who want to build up a nest-egg for them. Government matching grants and tax-deferred growth are the main benefits.
Something I often encourage parents to consider is that there’s no better way to provide for your children’s financial future than to take care of your own financial present. Smart financial decisions today for parents lead to good financial outcomes tomorrow for your entire family — children included. And being financially independent yourself gives you the opportunity to provide for your dependents.
And perhaps even more important is the return on investment from teaching kids good financial values. because after all, what good is the ultimate value of a child’s trust account if they don’t make smart decisions with it once they get it?