Securing a child’s future financially in Canada is quite an overwhelming task that requires proper financial planning and commitment. Most parents strive to give their kids the happiest and healthiest life but forget about their future financial security.
According to Ipsos, 79 percent of Canadian parents use the Canada Child Benefit (CCB) to save for their kid’s financial future. However, there are many other savings options with numerous childcare benefits, including life insurance policies and savings accounts.
In this guide, we explore various investment options that can help to secure your child’s financial future in Canada. Keep reading and learn some of the best ways to achieve that.
Best Investment Options to Secure Your Child’s Future in Canada
With proper financial planning, securing your child’s financial future becomes easier. Here are the most helpful methods and tips for saving and investing for your child’s future.
1. Registered Education Savings Plan (RESP)
It is no doubt that the cost of postsecondary education is becoming more expensive over time, necessitating the need for an affordable savings plan like an RESP. Statistics Canada reports that tuition fees for undergraduate studies rise by 3% every year on average.
Figure 1: Average Undergraduate Tuition Fees in Canada, 2006-2017
What is RESP and How Does it Work
An RESP is a registered savings account that allows Canadian parents to save for their kids’ post-secondary education. Parents contribute to the accounts periodically to keep enough money for higher education expenses, including high tuition fees.
What’s unique about an RESP is that the government offers incentives to encourage parents to save more money in it. The incentives are in the form of the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).
Usually, the Canadian government offers grants of 20 percent of the parents’ contribution, up to CA$2,500. In other words, all beneficiaries with RESPs can only receive a maximum grant of CA$500 per year. However, low-income families are eligible for additional grants.
If you save for your child’s future education in an RESP, your investments will grow tax-free, including capital gains and government grants. The tax-advantaged RESP accounts will increase your savings to help you keep up with rising tuition fees.
If your child enrolls in an eligible college or university, the government disburses the funds to them in the form of Educational Assistance Payments (EAPs). The withdrawals are also non-taxable and should only finance post-secondary education expenses.
According to a Knowledge First Financial Review of the Future State of Education Costs in Canada, beneficiaries can use RESP funds to finance a vast range of expenses. Some of them include tuition fees and accommodation costs.
Useful Tips for Saving Money in RESPs
In a nutshell, let’s look at the tips that can help you maximize the benefits of RESPs.
- Start saving as soon as you give birth to your child to increase savings. You’ll get the government grants for 18 years.
- Contribute at least CA$2,500 yearly to take full advantage of the government grant. If you don’t manage to raise the entire money, you can carry forward the unused grants to future years.
- Automate contributions to your child’s RESP account. You can authorize direct deposits from your employer into the account.
2. Life Insurance Policy
You can buy for your child a life insurance policy to cover them for life. This coverage is not only about death benefits. It also has compounding interest to grow your investment within a tax-advantaged environment of the insurance contract.
To maximize the benefits of a life insurance policy for your child, you need to buy a whole life policy (cash value) from a reputable company. The whole life insurance policy consists of two components; the cash surrender value (CSV) and the death benefit (DB).
An insurance company pays off the death benefit only when the policyholder dies, without getting taxed. But with the cash value policy, the insured individual can borrow from it tax-free or terminate the insurance contract to get the CSV amount.
You can access the money at any time during your child’s lifetime. When they become of age, you can transfer the policy to them without being taxed. Later on, your child will be free to withdraw the money or channel it to their retirement savings.
Advantages of a Life Insurance Policy
You can build a whole life insurance policy and tap into the excess CSV to secure a child’s financial future. Here are the reasons to establish a life insurance policy for your child.
- Application is simple and not time-consuming. It takes you a few days to get an approval rather than weeks or months
- Once you establish the policy, an insurance company cannot re-price it. Any future medical problems that could make a new policy more expensive will not affect the price.
- Cash surrender value of the life insurance policy can also help in paying the child’s college or university fees. Besides, it doesn’t affect the ability to get financial aid.
- Upon retirement, your child can take out tax-free loans from the policy’s CSV. The loan must not be refundable. However, that will reduce the death benefit.
3. Non-registered Savings Accounts
If you are not planning to use a whole life insurance policy or save in an RESP account, maybe because you have reached the maximum lifetime contribution limit of CA$50,000, you can opt for a savings account. Here, you’ll dedicate the account to your child.
When opening a savings account for your child, specify its purpose, whether it’s for their future education for their future living expenses before securing a job. It will also motivate the child to contribute some money into the account, whenever possible, as they grow.
Non-registered savings accounts are simple to create and easy to understand. They are also highly flexible. You can withdraw money at any time to take care of emergencies. You can still retain control of the account even when your child becomes an adult.
However, the downsides of traditional savings accounts are that you might get tempted to withdraw the money all the time, reducing a child’s savings. They also have lower interest rates than registered savings accounts that come with numerous tax benefits.
Tips for Maximizing the Benefits of a Traditional Savings Account
Here are the things to do to increase your child’s savings in a non-registered account.
- Open a savings account in a financial institution with minimal requirements. It must not set minimum account balances and charge fees for low-balance accounts.
- Set up an automatic savings plan to build up your account. Try to limit the number of withdrawals by cutting back unnecessary expenses.
- Consider keeping money in a high-yield savings account. It offers significantly high-interest rates that can earn more money for your child.
- Create an effective budget and track your spending. It will help you identify the expenses you need to reduce to boost your savings.
4. Set Up a Trust Account for Your Child
A trust is a legal agreement that allows you to transfer money to your child under specific terms. That includes the purpose of the funds and the age at which your child will receive it. With a trust account, you rest assured that your money will serve the intended purpose.
When setting up the trust account, ensure that you sign a written agreement that specifies the terms and conditions you wish your child should inherit your assets. That will prevent them from misusing the investments set apart for them.
How to Establish a Trust Account for Your Child
Creating a trust account for minors is a long term decision that most parents find it challenging to make. One good thing about this is that your assets will have grown by the time they get it. Here are the steps to follow when setting up a trust account for your child.
- Step 1: Choose a trustee to oversee and take care of your trust in case you die when your child is still a minor. They will distribute the assets based on your terms.
- Step 2: Specify how you want the child to get the inheritance. At this point, you should consider how spendthrift your child is.
- Step 3: Ensure that you create trust documents in the presence of legal authority. You can do that with the help of an attorney.
- Step 4: Transfer your assets into the trust account. Consider funding the account with long-term investments, like savings bonds and stocks, if the child is still young.
What you should do if Your Child is Spendthrift
Some children can be too reckless to misuse their parents’ investments in trust accounts. When you have to set up a trust account, but you realize your child is too spendthrift, here is what you need to do.
- Distribute Assets Based on Age: Distribute the assets in increments as the child grows and becomes more mature. For instance, you can increase the inheritance after every five years. That will prevent them from spending the money all at once.
- Choose a Lifetime Trust: Securing money in a trust account for a child’s lifetime offers liability protection over the assets. With this, the trustee can never allow the beneficiary to demand vast amounts of money.
Saving money for your children is the best way to secure their future financially in Canada. When saving money, separate the savings account based on purpose. For instance, an RESP account should typically finance a child’s higher education. A traditional savings accounts can fund a vast range of expenses in the future.
By specifying the purpose of an investment, it becomes easier to customize the accounts to fulfill your child’s financial needs in the future. Your efforts to save will also present an opportunity for your child to learn more about financial management. As you save, also remember to invest in long-term investments like stocks and savings bonds.