Helping adult children save

Many young adults want to put money aside, but their cost of living prevents them from saving and investing. You may consider helping out your child or grandchild to give them a head start on meeting their financial goals.

Today, a young Canadian may have contribution room in three different plans: a Tax-Free Savings Account (TFSA), a First Home Savings Account (FHSA) and a Registered Retirement Savings Plan (RRSP). Not taking advantage of this contribution room can be a lost opportunity, as there’s less time for investments to grow and compound.

Benefit from tax-free savings. Canadians can open a TFSA at age 18 or 19, depending on the province, but not all will be financially able to contribute. You can give your child or grandchild funds they contribute to their TFSA to get them started on investing. Each young adult will have their own particular financial needs, and a TFSA gives them flexibility to meet a variety of short-term or long-term goals.

Save for retirement. Gifting funds your child or grandchild can contribute to their RRSP typically applies to two situations. In one, the individual wants to contribute to their plan—or contribute more—but cannot after making rent or mortgage payments, car loan payments and covering other living expenses. Not only will your gift boost their retirement savings, but the tax deduction will help them now. In the second situation, your child or grandchild has RRSP contribution room from earned income but is still a student and not thinking about retirement. In this case, you have an opportunity to talk to them about the significant impact that starting early makes on wealth accumulation.

Build a down payment. An FHSA gives your child or grandchild a tax deduction on contributions, along with tax-free growth and withdrawals, but the account can only remain open for 15 years. So, to benefit the most from compound growth, they should contribute as much as possible, as soon as possible. On their own, they may be unable to contribute the $8,000 annual limit for five consecutive years to reach the $40,000 lifetime maximum. Your financial assistance could help them achieve or approach the contribution limit.

A learning opportunity. Helping a young adult child or grandchild save is also a way to introduce them to investment basics. Key topics they should learn about include compound growth, the roles of stocks and bonds in a portfolio, and how asset allocation is determined by risk tolerance and when they’ll need the money. You can also ensure they know they have the option to defer their tax deduction for RRSP or FHSA contributions so they can save more tax in a year they’re in a higher tax bracket.

If your child or grandchild would like help opening a registered plan or making investment decisions, please get in touch.