Like many parents, my husband and I want to support our kids with funds to pursue postsecondary education, start a business, buy a home, or achieve another big life goal. They’re toddlers, so we have plenty of time to save before they graduate from high school.
We’re already topping up their registered education savings plans, or RESPs – the best place to save for their postsecondary education, thanks to the annual 20-per-cent matching contributions from the government (up to a lifetime maximum of $7,200 per child).
But when I started investigating the best vehicles to save for my children’s future beyond an RESP, I quickly learned that my options were limited.
I turned to my own adviser, certified financial planner Scott Syrja, from Toronto-based Syrja & Associates, to learn more. As a parent himself, he’s bullish on RESP contributions, but only up to $2,500 a year, since that would max out the government matching contributions, at which point he suggests alternatives.
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In most cases, he says, you have to be the age of majority (18 in most provinces) to open savings and investing accounts in Canada, which means like with an RESP, parents are investing on behalf of their children, and turning over the funds when they’re older.
A child under 18 can open a registered retirement savings plan, or RRSP, with approval from a parent or guardian, if they are collecting a paycheque and filing tax returns. Children can also open non-registered savings accounts, either on their own or with the approval of a parent or guardian, depending on their age, and this can be an effective way to teach money management basics, like how to handle an small weekly allowance.
But Mr. Syrja says allowing minors to hold savings accounts, especially if parents are contributing to the accounts as well, is risky. “I don’t see a need for accounts owned by minors where the money was deposited by the family. If that is the case then the child would have access to money before they are mature enough to make reasonable decisions,” Syrja said in an e-mail.
His preference instead is to open a tax-free savings account, or TFSA, under one or both of the parents’ names that is specifically for the kids. If the parents have reached their TFSA limits, he would open a non-registered savings account for the same purpose – something he’s done for each of his own children.
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But using your own TFSA room to save for a child means missing out on years of tax-free growth to support your own financial goals. And while opening a savings account and regularly depositing money for your children sounds like the easiest path, it misses the one crucial thing I love about RESPs and RRSPs: it’s tough to take out the money.
In the case of an RRSP, there are penalties and tax consequences for removing money too soon and in the case of an RESP, you could lose the government grants.
In contrast, parents could quite easily dip into a TFSA or savings account to pay for a last-minute expense or a home renovation. Of course, no parent plans to spend money designated for their child but the more inaccessible the money is, the better.
So how do parents protect themselves from themselves – where can they save so they can’t easily spend the savings they have built up for their kids?
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A formal trust is one way to do this, since it requires the trustee overseeing the trust to distribute the trust assets according to set rules. For example I could set up a trust for our daughters, stipulate that the funds must be given to my children at age 25. However, there are administrative costs to set it up and maintain it, including filing an annual tax return.
Mr. Syrja says another option is to open an informal trust account, an investment account that essentially just indicates these funds are for your child. While you aren’t legally bound to pay out the trust proceeds to the beneficiaries like with a formal trust, he says this setup provides a “psychological barrier that mostly protects those funds.” Even though they are not formal trusts, new tax rules as of Dec. 1, 2023 require most informal trusts to file annual tax returns, which adds an administrative burden.
One final option I’ve pursued is whole life insurance in our daughters’ names. They offer a death benefit to the beneficiary, and they accumulate a cash value, so our daughters could cash them out in future. However, these aren’t as straightforward as a traditional savings account, and the premiums can be pricey.
Whatever method you choose, the key is to map out a strategy first, and then set up the structures that help you achieve that. For my husband and I, a new kitchen is way less valuable than helping our kids get a leg up in the future.
Erin Bury is the co-founder and CEO of online estate planning platform Willful.co. She lives in rural Ontario with her husband and two young children.
