Children present unique financial planning opportunities. Some strategies are widely known, like RESPs … but others are not. Therefore, let’s look at the options when planning for your little one(s).
Registered Education Savings Plans (RESPs)
RESPs are exclusively for education planning since money can only be withdrawn when a child is in a qualifying college, university, or apprenticeship. They can be opened by parents, guardians, or grandparents as soon they have a SIN. The government matches 20% on the first $2,500 in contributions annually - that’s $500 in grant annually, up to $7,200 in lifetime grants per child.
RESP money grows tax-sheltered. Only the grant and growth become taxable to the student when withdrawn, which can be offset by their student tax credits. Once out, the money can be used for any expense, not just tuition.
Look for a RESP that provides flexibility on contribution and investment options. You’ll want one that suits your current situation while allowing adjustments should your cashflow change.
In Trust for Accounts (ITFs)
ITFs are another investment account used to save for a child’s future. Unlike RESPs, ITFs can be used for any goal – education, car, home, etc. Many use ITFs to earmark an eventual inheritance.
ITFs can be used to introduce kids to investing – like an account with training wheels – it is under your authority. Then, on their 18th birthday, you can give them ownership or wait until they are ready to manage investments.
Anyone can set up an ITF for a child. However, keep in mind they are intended for long-term goals and taxes must be paid on any dividends, interest, and applicable capital gains at tax time.
Life Insurance
There are two life insurance strategies to contemplate when you have kids. One is having life insurance on yourself. No one wants to open a GoFundMe or sell a house while grieving, especially when there are children.
Two is purchasing a small whole-life policy, with a cash surrender value, for your child while it’s cheaper. Insurance will give you the financial resources to grieve if needed plus it provides your child with financial tools into adulthood. First, they have coverage no matter their future health. Second, the cash surrender value can be used as collateral on a loan/mortgage or as emergency cash.
Your Estate
When you have children it’s extremely important to have an updated will. You should discuss the finer details with your lawyer, but you must designate a guardian and a trustee for your kids – someone to raise them and another to manage the money. This can be the same person.
Considerations:
Financial planning with children can be overwhelming, to discuss your options, contact us at KLT Wealth Management.
- Courtney Beach, QAFP
