This article is brought to you by Insurance for Children, Canada’s leader in financial planning for children and the creator of Child Plan ™ the fastest growing alternative to the RESP
As a new parent, nothing compares to all the “firsts” you experience, the joys and challenges – and the inevitable ups and downs. Nothing truly prepares you for it, either. What you can prepare for is the cost. While it’s difficult to calculate the exact dollar figure of raising a child from birth to high-school graduation – specific expenses vary from family to family – past studies and calculators estimate a cost near or above $200,000 per child.
When thinking about your child’s future, you might ask yourself, what are the best investment options for my child?
There are of course, so many options when you want to invest money, from mutual funds, investment accounts, exchange traded funds, registered education savings plans, or even a life insurance policy.
What are some of the best ways to provide the best financial future for your child? Preferably something with tax advantages and growth potential, while remaining low risk with the certainty of having money available when your child needs it.
Best Ways to Save Money in Canada
You should ideally begin saving for your child early.
Increasingly today in Canada we are seeing parents taking out loans to pay for their child’s post-secondary education or being guarantors and paying the deposit for their child’s first home deposit.
If you start saving for all these expenses now – the big and the small – you can be far better prepared to meet these costs when they come along and ensure greater certainty of financial success in your children’s future.
Government benefits can help, particularly the Canada Child Benefit , which provides a tax-free, annual benefit of up to $6,765 per child under age 6, and up to $5,708 per child from age 6 to 17. How much you receive is dependent on your income.
These days, bank accounts do not pay high interest rates, so they are not a great way to save for those bigger expenses that come along as the child gets older.
Many parents contribute a small amount from each pay packet and use these savings for those smaller expenses that keep coming along on a regular basis.
At the same time, you can use the account to teach kids, to understand sound money management and gain financial literacy. You could encourage your child to save allowance and gift money to buy a desired item, rather than have you buy it. Getting a child interested in investing starts to build a foundation of inquisitiveness for them as well as building confidence in speaking about money.
A Registered Education Savings Plan (RESP) has long been the default plan used by Canadians to save for their child’s education after High School. You can contribute up to $50,000 of your own money into the plan.
An RESP investment account has two major advantages for you:
1. Parents can boost the savings with The Canada Education Savings Grant (CESG), plus low-income families may also be able to access further grants from their provincial government education grants.
2. The investment will grow tax-free and you avoid paying tax until you make withdrawals to fund educational expenses. Because your child will be a student when they withdraw, their income is likely to be low, and so will be their tax rate, they may not have any tax to pay.
The biggest disadvantage of an RESP is if your child does not attend one of the government’s specified Canadian educational organizations or does not seek further education after high school. With the new developments in how education can be delivered, more Canadian students will be able to access education outside of the country from the comfort of their bedroom.
If the RESP is not used, any grants received go back to the Canada Revenue Agency. You get your contributions back and any investment growth which is taxable at your personal rate along with a 20% tax penalty.
Canada Education Savings Grant (CESG)
This grant entitles families with an RESP to receive up to $500/year up to a maximum of $7,200 before the child turns 18.
To gain the maximum, you need to contribute $36,000 of your own money to your RESP. You would also need to start the RESP soon after birth.
Tax-Free Savings Account
You must be 18 years old to open a Tax-Free Savings Account (TFSA) in Canada. This is an account with a financial institution governed by Federal government guidelines. There is currently a limit of $6,000/year you can contribute, and this can change each year. There is a tax penalty if you over-contribute.
If you contribute less than the maximum in any year, you can make it up in the future.
Your money grows tax-free, and you can withdraw at any time and use the money for anything. For a couple you can combine your accounts giving you a limit of $12,000/year, and if you do not save the full amount in any year, you can make it up later.
Withdrawals do not impact any government benefits you might be entitled to receive, and the funds are not taxed upon death.
A TFSA could be used to meet many savings goals as well as gifting some or all your account to meet your children’s financial goals as they arise. It could be used to fund their post-secondary education, a deposit on a first home, overseas experience, buy a business, etc.
You can put many types of investment into a TFSA such as a mutual fund. It depends how complex you want to make it and the investment risk you are prepared to take.
If you are using a TFSA to save for your child’s future financial needs, there is the danger that some other need of your own comes along and takes precedence over your child’s financial goal. And if you have more than one child, how do you treat each equitably?
A TFSA provides no protection from Creditors, if you get into financial difficulties, these savings can be taken by creditors.
Whole Life Plan – Child Plan ™
Child Plan ™ can be used for any financial need in your child’s lifetime, but it also doubles as a fund for higher education. Considering it can be opened just 14 days after birth, Child Plan ™ gives you so much more time to begin, and then finish, saving for your child’s post-secondary education and avoiding student debt.
However, it could also be used for a down payment on a home, starting a new business, or to provide financial security for their own family, or for any other purpose. You cannot make withdrawals before the child is 18, and the plan can never be taken by creditors.
Child Plan ™ can be the ideal means of financial support for any big expense once the child turns 18. When you feel they are responsible enough, you can make the child the account owner and put them in charge of their personal finance.
Child Plan ™ is the fastest growing alternative to RESP. Its gains are non-taxable, you can make withdrawals from the cash value after your child turns 18 years, and you have the option of continuing the plan, with or without regular contributions, until the death of the Life insured (the child).
Anyone can open a Child Plan ™ for a child under 18 years of age. There are no limits on the yearly or total contributions. The policy owner can withdraw some or all the entire cash value at any time after age 18, for any purpose, non-taxable! Any time after your child turns 18, you can transfer ownership over to them. If the plan is still in place at the time of the child’s death, Child Plan ™ will pay out the life insurance sum insured, and the amount payable will be significantly higher than the cash value of the plan.
Child Plan TM is a very flexible investment, it can be adapted to meet the child’s changing future. To see how the cash values and sum insured increase over time, you can request an illustration from https://www.insuranceforchildren.ca/request-illustration.
To learn more about Child Plan ™, please visit insuranceforchildren.ca.