Many grandparents, including my mother enjoyed gifting money to their grandkids on birthdays and/or special holidays. However, handing over an envelope of cash to the adult children isn’t always the best option. When asked, I suggest grandparents (or aunts/uncles) invest the money directly for the kids into an Registered Education Savings Plan (RESP) or an In-Trust-For (ITF) account.
RESPs are one of the best vehicles to help save for a child’s post secondary education. Probably the biggest benefit of an RESP is that the government will match contributions up to 20% of the first $2500 or $500 annually. If the contributions are not maximized out in a given year, the unused portion can be carried forward and invested in future years. The maximum grant that can be received in one year is $1000, per beneficiary. Accounts are usually set up by parents and contributions can be made monthly or by lump sum (gifts). Contributors do not receive an income tax-deduction; however, the income and capital gains as well as the grant monies will grow tax-sheltered until withdrawn.
The money withdrawn from an RESP is meant to be used for educational purposes. If withdrawn for any other purpose the grant money received must be paid back to the government and the income/growth will be taxed accordingly. I would suggest speaking with the parents first to see if they have already opened an RESP account for the child. If they have, it might be best to invest your gift in the existing account, this will eliminate the risk of over-contributing in a given year and missing out on the grant.
In-Trust-For accounts are normally set up for a minor child and are a popular alternative to the RESP because of their flexibility. These investment accounts have no contribution limits and there are no government grants available. The accounts are structured as ‘informal’ trusts, which means the investments legally belong to the beneficiary (the child). While the beneficiary is a minor, any income earned on the account (dividends and interest) will be attributed back to the contributor, whereas any capital gains will usually be attributed to the child. When the child reached the age of majority (usually 18yrs) they take control of the assets.
Unlike RESPs, the money can be used for anything – as long as it is for the benefit of the child. Many grandparents/aunts/uncles like having a separate account with the accumulated funds they have gifted over the years. Then when the time comes, the account can be transferred into the child’s name and he/she can use the funds for whatever they want, buying a house, a car, or paying for their education or wedding.
Although we had RESPs set up for our children, my mom wanted to have her gift set aside in a separate account. We set up ITF accounts for all the grandchildren, she invested a little bit every year at Christmas. It was a wonderful surprise for the grandchildren to receive a little chunk of money from Nana upon her passing earlier this year.
If you would like more information on these or any other types of investment accounts, please don’t hesitate to give me a call.
Have a great weekend,
Tracey
Sources: https://www.fidelity.ca/en/insights/articles/resp-basics/ Chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://investingwithpurpose.ca/wp-co ntent/uploads/2018/08/Dynamic-RESP-Guide.pdf
Photo by Jess Bailey on Unsplash
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