How to invest for your kids futures (Canada & US)
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Depending on where you live, there are age restrictions for when you can start investing. Many provinces and states require you to be 18 or 19 years old to open up an investing account, but that doesn’t mean you can’t get started before then.
In today’s issue, we’re going to be discussing how you can start investing for your children even if they’re below the required age. Compounding is much more powerful the earlier you start, so if you’re looking to build up a significant sum of money for your child once they become of age, keep reading!
How to invest for your children in Canada 🇨🇦
Being Canadian, I had to go through this process when I was 17 years old so I could start investing my own money.
If you’re underage, however, you will be unable to open an account under your own name. Fortunately, parents can open accounts for their children.
RESPs
The most common saving tool for children is a Registered Education Savings Plan (RESP) which is a tax-deferred way to save money to fund post-secondary education like trade school, college, or university tuition. You won’t get a tax deduction when you contribute, but you will be eligible for a government grant called the Canada Education Savings Grant (CESG) which makes up 20% of your contributions up to $2,500 per year per child.
When it comes due to withdrawing the money inside the RESP, the original principal can be withdrawn tax-free and the government grants and any investment growth will be taxable to the child, or whoever’s name is registered to the account.
Grandparents can even open RESPs for their grandchildren, so when they’re 18 and ready to go to college, they have enough money to help with their education.
TFSAs
Tax-Free Savings Accounts (TFSAs) are another great way to save for your children. Keep in mind there are contribution limits to a TFSA that are set by the government, but the contribution room isn’t tied to earned income from employment like an RRSP.
There are also no tax penalties or implications for a parent or grandparent who contributes to their children’s TFSA. An important thing to consider however is that the TFSA belongs to the account holder (you), not your child. Therefore any money you contribute to that account is essentially a “gift” for someone else.
I personally love TFSAs and always make sure to max out my own before contributing to any other account. Inside you can hold bonds, ETFs, stocks and trade options. If you like tax-free money, a TFSA is your best bet.
Insurance
Buying life insurance for your teenage children may be a good idea. Eventually, they will be going out on their own with a family and have financial dependents, so they will need life insurance to protect their income and ensure their family is well taken care of in the event that anything should happen.
Young adults in their 20s are underinsured against the risk of disability and illness, so having that insurance policy in place for them before they reach their 20s may be a smart idea to protect them.