Many young people spend their hard-earned money on the usual things that young adults enjoy, not giving much thought to a retirement 45-50 years away. Canadian income tax rules allow for an indefinite carry-forward of unused RRSP deductions. Gifting money to make a contribution to your grandchild’s RRSP is a gift that keeps on giving. The combination of compound growth or accumulation of money over time can create substantial savings inside an RRSP.
To make an RRSP worthwhile, a minor RRSP holder should have earned money enough to allow for an RRSP contribution, based on 18% of income earned in the previous year and must have filed a tax return with Canada Revenue Agency (CCRA). An RRSP can be opened for a minor at any age, provided the minor has a social insurance number. Many financial institutions require a parent or legal guardian to the sign the RRSP account documents as the signature of a child is not legally binding. The minor can postpone claiming the tax deduction until a later date as there is no time limit and it may be prudent to wait until the grandchild is in a higher income tax bracket before using the deduction.
There are many ways children can earn income- any amount under the basic personal amount will not attract income tax. Income must be legitimately earned and not an allowance. If the grandparent or parent owns a business, the grandchild can earn a salary/income from the business. The salary or wages paid must be equivalent to what a stranger would be paid for doing the same work. There are many jobs a child or grandchild can perform.
It is important to help children or grandchildren understand that a contribution to an RRSP builds money for retirement, the children or grandchildren are building funds for their own future use. RRSP contributions can be withdrawn without income tax if the proceeds are going to towards the purchase of a first home or their education. Contributing to your child or grandchild’s RRSP is a great way to transfer wealth from one generation to the next. This is as an efficient estate planning tool which creates a win-win scenario of all concerned. If you are in a position to help your child or grandchild save for their future, consider a contribution to the child’s Registered Retirement Savings Plan (RRSP).