RRSP for Children: The Ultimate Guide for Parents

Registered Retirement Savings Plans (RRSPs) are tax-advantaged savings and investment vehicles designed to help individuals save for retirement. RRSP accounts for children allows them to save for their future while learning critical financial literacy lessons. In addition to teaching them about savings, RRSPs can also build a foundational block towards your child’s first home or post-secondary education.

---

Table of Content

---

RRSP 101: The Basics

I, like many other adults in Canada, have used RRSPs to save for my retirement and lower my taxes. This begs the question – is there a need for my child to have an RRSP? Are there any advantages of introducing this concept to our children? Do RRSPs for children make sense, considering that they are a long way away from the retirement age? Let’s dive in.

What is an RRSP

RRSPs allow individuals to contribute a portion of their income into the account. These contributions are tax-deductible, which means they can reduce the contributor’s taxable income. Inside RRSP, investments can grow tax-free until they are withdrawn, ideally during retirement. For years, adults in Canada have used RRSPs to save for their retirement and lower taxes. While uncommon, RRSPs for children are a powerful tool in their financial prosperity journey.

Minimum Age of RRSP for Children

This is one of the most important pluses of an RRSP. There is no minimum age requirements for opening up an RRSP. Therefore, students and children can open RRSP accounts. Minors looking to open an RRSP account must get consent from their parent or guardian. If your child has earned income and filed income tax returns, they can open an RRSP account. This could be in the form of a part-time job, summer employment or side gigs. RRSPs can be an excellent opportunity to teach your child about financial responsibility and the benefits of saving early.

RSP v/s RRSP

What is Registered Savings Plan (RSP)

Simply put, RSP is a basket of registered (with CRA) instruments and plans that an individual in Canada can hold to grow their wealth and save money.

Registered Savings Plans (RSPs) and RRSPs may sound similar, but there are significant differences between the two. Each Registered Savings Plan has different tax implications. RRSPs are one of the categories of RSP. Some of the other types of RSPs include Tax-Free Savings Accounts (TFSA) and Registered Education Savings Plans (RESPs).

Contribution limit for RRSP

Understanding the contribution limits for RRSPs is crucial, as exceeding these limits can result in penalties. Contribution limits are based on the contributor’s income and are subject to annual changes. The yearly RRSP contribution limit is 18% of your earned income plus any unused RRSP limit, up to a maximum yearly contribution limit, which was set at $30,780 for the 2023 tax year. While the chances of your child contributing above the limit are less, it is essential for them to check annual limits to ensure compliance. This will help them understand the concepts better as they increase their earnings in adulthood. If your child has been filing Income Tax Returns, the contribution limits are also available in the Notice of Assessment.

Advantages of Opening up an RRSP Account for Your Child

Teach Them the Power of Savings

One of the most significant advantages of opening an RRSP account for your child is the opportunity to teach them the power of saving. By contributing to their RRSP early on, you impart the value of setting money aside for future goals and needs. Children learn the importance of delayed gratification, a valuable life skill.

Starting young also allows them to get accustomed to budgeting and financial planning. These skills, when used with tools such as our budgeting worksheet, will serve them well throughout their lives. Moreover, it can instill a sense of responsibility as they actively participate in managing their RRSP.

Witness Compound Interest

The magic of compound interest is a financial concept that can significantly benefit your child’s RRSP account. Compound interest means that your investments earn interest not just on the initial contribution but also on the interest previously earned. Over time, this can lead to substantial growth.

By starting early, your child’s RRSP contributions have more time to grow through the power of compounding. This can result in a considerably larger retirement nest egg. Teaching your child about the power of compounding can be a valuable lesson that encourages long-term thinking and financial discipline.

Tax Benefits

One of the significant advantages of RRSP accounts is the tax benefits they offer. While your child may not be as concerned with taxes as adults are, understanding these benefits can be educational. Here’s a simplified explanation:

• Tax Deductibility: Contributions made to an RRSP are tax-deductible, reducing the contributor’s taxable income.
• Tax-Deferred Growth: Investments within an RRSP grow tax-free until they are withdrawn. This means your child’s earnings remain sheltered from taxes, allowing them to accumulate more wealth over time.

By opening an RRSP for your child, you’re essentially setting up a tax-advantaged account that will serve them well throughout their life. This is achieved by helping them achieve their financial goals and providing financial security in retirement.

Support their home-buying or post-secondary education

RRSP for children can serve multiple purposes beyond retirement savings. For your child, they can act as a financial springboard for significant life events, such as buying their first home or funding post-secondary education. Here’s how:

• Home Buyers’ Plan (HBP): If your child decides to purchase their first home, they can withdraw up to $35,000 from their RRSP under the Home Buyers’ Plan without incurring taxes. This is an excellent way to support them in achieving homeownership.
• Lifelong Learning Plan (LLP): For those pursuing post-secondary education, the Lifelong Learning Plan allows your child to withdraw funds from their RRSP to finance their education without penalty. This plan helps alleviate the financial burden of tuition and other related expenses.

It is important to note that these withdrawals can be paid over a 10 to 15-year time frame. In addition, these withdrawals (or loans) carry 0% interest, thereby making this the Best Debt that is available.

In conclusion, opening an RRSP for your child offers many advantages. From teaching them essential financial skills to harnessing the power of compound interest and enjoying valuable tax benefits, the benefits are substantial. Furthermore, RRSPs can adapt to your child’s evolving financial goals, whether they’re saving for retirement, buying their first home, or investing in education.

Downsides of Opening an RRSP for Children

There are situations when RRSP may not be the most effective way for them to save and invest. Some of the possible downsides of RRSP for children include:

• Tax savings from an RRSP contribution may not be negligible or absent. As an example, if your child earns $11,000 through a part-time job, they aren’t paying tax anyway. If tax saving is your only goal, then it may be wise to carry over the RRSP limit into adulthood when they may be earning more.
• Financial institution policy to open an RRSP for minors. While it is legal to set up an RRSP for a child in Canada, some financial institutions do not allow minors to open RRSPs. As an example, online brokerages do not allow RRSPs for minors. Hence, conduct extensive research before finalizing the financial institution for your child’s RRSP.

Setting up RRSP for Your Child

Evaluate and choose Financial Institutions:

Select a reputable financial institution or bank to open the RRSP account. You can opt for the same institution where you hold your own RRSP or explore various options to find one that suits your child’s needs. Ensure that the financial institution offers RRSP accounts specifically designed for minors

Setting up the Account:

Visit the chosen financial institution’s branch or website to set up the RRSP account. You’ll need to complete the necessary forms, including designating your child as the account holder. You will also be required to provide your child’s social insurance number (SIN). To open the account, you’ll typically need to provide identification documents for both you (as the parent or guardian) and your child. The documents required may vary by institution, so it’s a good idea to contact the financial institution in advance to ensure you have everything you need.

Make Contributions and Choose Investments

Once the account is established, you can have your child begin making contributions. As mentioned earlier, there are annual contribution limits based on a percentage of your child’s earned income. Going above the maximum contribution limit means penalties. Keep track of contributions to ensure your child remains within the limits.

Select appropriate investments for the RRSP account based on your child’s time horizon and risk tolerance. Standard investment options include mutual funds, stocks, bonds, and Guaranteed Investment Certificates (GICs). Diversifying the portfolio can help manage risk and potentially maximize returns over the long term.

Monitor and Manage:

Regularly monitor the RRSP account’s performance and make adjustments as necessary. You may consider increasing contributions as your child’s earnings grow or altering the investment mix to align with your child’s goals.

Continuous Education

Take this opportunity to teach your child about the RRSP account, the importance of saving, and the potential benefits of long-term investing. Involving them in financial discussions and decisions can empower them with valuable knowledge and skills.

Considering Beneficiary Designations

In the unfortunate event of your passing, you can designate your child as the beneficiary of your RRSP account. This allows the funds to transfer directly to your child’s RRSP, which can be a tax-efficient way to pass on your wealth.

By following these steps, you can set up and manage an RRSP account for your child, providing them with a valuable tool to secure their financial future. Remember that the key to success is consistency – making regular contributions and wise investment choices will help your child’s RRSP grow over time.

Some Other Registered Savings Plans

In addition to Registered Retirement Savings Plans (RRSPs), other valuable investment accounts can play a significant role in your child’s financial future. Let’s explore two popular options: Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs). While your child may not be able to open and operate these, you can consider them as essential aspects of your portfolio.

Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account, or TFSA, is a versatile investment account that allows Canadians to save and invest their money without incurring taxes on the investment growth. It’s important to note that TFSA contributions are made with after-tax dollars, meaning you don’t receive a tax deduction for contributing. However, all earnings and withdrawals within a TFSA are tax-free. This flexibility makes TFSAs an attractive choice for both short-term and long-term goals.

Registered Education Savings Plan (RESP)

A Registered Education Savings Plan, or RESP, is designed to help parents save for their child’s post-secondary education. RESP contributions are not tax-deductible, but they grow tax-free within the account. The government provides the Canada Education Savings Grant (CESG) to match a portion of your contributions, helping your savings grow faster. RESP funds can be used to cover a variety of educational expenses, including tuition, books, and more.

Difference between RRSP, TFSA and RESP

Now, let’s compare these three investment accounts—RRSP, TFSA, and RESP—in a tabular format to highlight their key differences:

Feature	RRSP	TFSA	RESP
Minimum Age	There is no specific age requirement.	18 year	18 years
Primary Purpose	Retirement Savings	Tax-Free Savings	Post-Secondary Education Savings
Tax Deductibility	Contributions are tax-deductible, reducing taxable income.	Contributions are not tax-deductible.	Contributions are not tax-deductible.
Tax on Growth	Investments grow tax-free inside the account.	Investments grow tax-free inside the account.	Investments grow tax-free inside the account.
Tax on Withdrawals	Taxable when withdrawn, typically during retirement.	Tax-free withdrawals at any time.	Taxable when withdrawn, primarily to cover education expenses.
Contribution Limits	Annual contribution limits are based on earned income and previous years’ contribution room.	Annual contribution limits set by the government (as of 2022, $6,000/year).	Lifetime contribution limit of $50,000 per beneficiary.
Special Programs	N/A	N/A	Canada Education Savings Grant (CESG) and additional grants are available.
Flexibility	Withdrawals can be made anytime, for any purpose, without penalty.	Withdrawals can be made at any time, for any purpose, without penalty.	Withdrawals are intended for post-secondary education expenses, with certain conditions.

Each of these accounts serves distinct purposes and offers unique benefits. When deciding which one is right for your child, consider their specific financial goals, whether it’s retirement savings, tax-free growth for future expenses, or funding their education.

Conclusion

With no minimum age requirement, RRSPs offer an excellent opportunity to kickstart your child’s financial journey early, instilling responsible financial habits from a young age. As parents or guardians, guiding your child through the process of opening and managing an RRSP can be a pivotal step in their financial education.

Opening an RRSP account for your child not only paves the way for a secure financial future but also imparts valuable lessons in financial literacy. It enables your child to learn about the power of savings and compound interest, all while enjoying significant tax benefits and the potential to support their first home purchase or post-secondary education.

However, it’s essential to consider their individual circumstances, goals, and financial responsibility level when deciding whether an RRSP is the right choice. By following the practical steps outlined in this blog post and involving your child in the process, you can help them build a solid financial foundation for the future. Do post in the comments below if you think RRSP is right for your child.