Monday, December 01, 2014
By Mya DeBrouwer, Digital Marketing Coordinator, Your Neighbourhood Credit Union
While toys and candy bring immediate gratification to grandchildren, a monetary investment is far more helpful and long lasting. Giving money, if done correctly, can have long term positive implications for your grandchild’s life, especially when it comes to helping with their education. The key is to know and understand the options available and to gain advice from a reliable financial planner.
WHAT ARE YOUR OPTIONS?
Cash: Cash can be given as an outright gift, or tagged for a specific purpose – to pay off a student loan, take a vacation, or to purchase a car. The benefit is that you will experience your grandchild’s appreciation first hand. A possible downside is that your grandchild may not spend the money in the way you envisioned.
RESP: Registered Education Savings Plans have become popular ways to save for education since the introduction of the Canada Education Saving Grant (CESG) in 1998. Through the Basic CESG, the federal government will contribute 20% of your annual contribution to the plan – up to $500 per child per year! There are numerous tax benefits to making RESP contributions, making this investment one of the most popular ways you can contribute to your grandchild’s future. Another advantage of RESPs is that it is a dedicated plan for educational savings. This means that you need to provide proof of a student’s enrolment to make a withdrawal on his or her behalf. One possible disadvantage of an RESP is that your grandchild may decide not to pursue post-secondary education. In this situation, the money may be transferred to another grandchild’s RESP account, assuming there is room under the cap space.
TFSA: Tax-free savings accounts can be set up for kids who are 18 or older. This is a good option for grandparents who never set up RESPs and have some money they want to use to help out a grandchild already in college or university. Tax implications are favorable, since withdrawals are tax-free. As well, investment income earned inside a TFSA is tax-free.
Canada Savings Bonds: Canada Savings Bonds are a time honoured choice for grandparents. Offered for purchase between October and December every year, Bonds offer a minimum guaranteed interest rate and are available in a variety of denominations. Savings bonds are a nice option as they have a low minimum purchase amount ($100). Bonds make a nice Christmas gift because they have the added benefit of being a beginner lesson in savings and investment for your grandchildren. However, while bonds are a safe choice with almost no risk, their rate of return in recent years has been very low.
In-Trust Account: An in-trust account is an informal trust that an adult can invest funds on behalf of a minor. One of the main benefits of an in-trust account is that the money can be used in the future for any purpose and not just for education, unlike an RESP. They are popular because they are easy to set up and have no ongoing legal costs. However, once you put your money into an in-trust account, the money belongs to your grandchild. You are no longer legally entitled to that money, even if you disagree with how it is being spent. Your grandchild takes control of the funds at the age of majority, and can do whatever they want with the money at that time. In fact, he/she can take legal action if you decline to give them access!
Before deciding on what kind of cash or investment gift to give your grandchildren, be sure that your own financial affairs are in order. Your first priority should be to make sure you have a financial plan in place for yourself and your spouse.
Meeting with a qualified financial advisor will help ensure that both your needs and those of your grandchildren are met. With the help of an advisor you can answer these important questions: What do I want to achieve? How much can I afford monthly or annually? What are the tax implications? Am I comfortable with risk? Is a low growth, low risk investment the best option? Am I looking for an investment directly tied to education, or will my grandchild benefit more from an investment with fewer restrictions?
These questions and many others can be answered by a Your Neighbourhood Credit Union representative.