As the holiday shopping season approaches, children will be looking forward to seeing what Santa Claus stuffs their stockings with this year.
If you’re struggling to think of a present for your kids, grandchildren, nieces or nephews, personal finance experts have a suggestion – put money into a Registered Education Savings Plan (RESP).
“My son said to me this week, don’t get the kids any more toys and don’t get us any more stuff for Christmas because we’ve got too much stuff,” said David Christianson, senior wealth adviser at National Bank and a grandfather to two young girls.
Instead of toys, Christianson has decided to make a large contribution to their RESP accounts.
While a five-year-old may not jump up in excitement at the prospect of a tax-deferred investment account, Christianson says it’s the kind of present that can grow in the long term.
“It’s a very responsible present,” he said.
An RESP is essentially a saving and investment account, much like an RRSP or TFSA, but focused on saving for a child’s education.
“It’s an account that’s set up by the Government of Canada to allow you to invest into a child’s education,” said Darren Robinson, a license mortgage broker and life insurance agent.
This kind of account has two major benefits over simply squirreling money away into a savings account.
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First, for every dollar you put in, the government puts in 20 per cent. However, the ceiling for that is $2,500 in annual contributions.
“If you put in $2,500 (in a year), you almost instantly got $3,000 earning tax-deferred investment,” Christianson said.
The other big advantage is that like any other investment account, the money grows a lot faster than a regular savings account.
“You can put these into stocks and market indexes that gain 12 to 15 per cent per year. There is some significant growth that can happen with these accounts,” Robinson said.
A third benefit is that while any investment growth will be taxed at the time of withdrawal, the original capital contribution comes out tax-free.
“They don’t need more toys, they don’t need bikes and things,” Christianson said of his granddaughters.
He said making a long-term investment is something that will take the pressure off their parents.
“I think it’s a wonderful thing for a grandparent to give as a gift at birthdays, Christmas, or whatever celebration the family engages in,” he said.
“The money’s going to compound.”
While most RESP accounts have a primary subscriber who can direct the withdrawals at a later date, usually the parent of the child, pretty much anyone interested in the well-being of the child can contribute.
“Aunts and uncles, godparents, just about anybody,” Christianson said.
Anyone that “really cares about the financial future of a child” can contribute, Robinson said.
Robinson said even a $100 contribution to the future of a child can go a long way.
“That compounding is dramatic,” he said.
According to TD Bank’s RESP calculator, a recurring $100 contribution to a child’s RESP made every year for 18 years could compound to roughly $9,756.23.
A $50 contribution every year could compound to $4,878.09 in 18 years, the calculator shows.
Christianson said he plans on using his RESP contribution to get his older granddaughter interested in financial literacy at an early age.
“Our five-year-old is at (a) point where she understands things. Not at a deep level, but we can say we put this money in and it’s growing, (and she says) ‘Oh that’s fascinating,’” he said.
Data shows many Canadians are planning on cutting back on spending this holiday season due to the cost of living, and factors like affordability and worries about the economy.
For those in a financial position to do so, an RESP contribution could help out the parents in their lives, Christianson said.
“Parents are under financial pressure across the country, no matter how good their jobs are. If they’re raising little kids, they’ve got a ton of things to spend money on. And if you can take that pressure off them, I think that’s a gift to give to the parents as well,” he said.
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