Tuesday, 23 February 2016

RRSP for my teenage son!

I was doing my yearly check of the RRSP (Registered Retirement Savings Plan) limits for my wife and I to see if we could or wanted to make any last minute February contributions on top of our monthly ones when I realized my teenage son had some RRSP contribution room this year.
Last year, he had a part time job working at a grocery store so I did his first tax return for him and he ended up with some contribution room.  He's not 18 so can't use a TFSA(Tax-Free Savings Account) yet so I thought why not make an RRSP contribution this year.  The thought of having some tax deferred saving starting when he’s in your teens so there’d be 40+ years of growth and compounding is very appealing.   My approach with my kids and money is very much in line with an article I read lately by Tim Cestnick called Three things every teen should understand about money.

So I talked over the idea with my son.  This is how it went:

Me: I think you should put some money in an RRSP.  You have $Y of contribution room from your job at the grocery store last year.
Son: Isn't that for people that want to retire?

Me: You're right RRSP stands for Registered Retirement Savings Plan and the original purpose was for people save for retirement tax free and pay less taxes later when their income was lower.   But now a lot of people use it for other things as well like a down payment for a house or for education.
Son: Why would your income be lower later?

Me: When people retire they don’t have pay from their job so their income is normally lower and they pay less taxes.
Son: Makes sense. Their tax rate is lower.
Son: Why can’t I just keep money in my saving account?  I’m getting some good interest there.  (He has one of these high interest savings accounts to save for university where he’s getting about 1.3-1.5%)

Me: You can but the bank will send you a special statement for all your interest called a T5 and you’ll have to pay tax on it.
Son: Huh. (with a tone implying this was news he may have to pay tax on interest)

Aside: We did have a separate talk about if you have a smaller income you will pay very little or no tax (i.e. $11,474 of taxable in 2016 without paying federal tax and varying amounts between $7,708 to $18,451 for provincial or territorial tax depending where you live.  See 2016 Personal Tax Credits - Base Amounts for exact amounts).

Me: I'll check out your options and then we can do it.
Son:  That's an awesome idea Dad! (The actual answer was more like "okay" but his tone definitely said awesome.  He's a teenager after all)

He didn’t take much convincing but I wasn’t surprised.  He’s always liked to save money.  When he was small, my wife and I would find him in his room with his piggy bank poured out on the floor counting and stacking his allowance.  Always made me think of Scrooge McDuck hanging out in his vault with his money.

So I’ve started the hunt for a good place to open an RRSP for someone only starting with 100’s of dollars.  

I’ll probably also include looking at a TSFA as well since he is only a couple of months from his 18th birthday.

I’ll do a future post letting you know how we made out.  It will be an interesting hunt because many mutual funds have $500 minimum initial investments, many RRSP Savings accounts interest rates are very low, the same for GICs if you can find one to buy with less than $1000 and then there are the various RRSP administration fees many financial institutions charge.

For those of you already with some ideas, please pass them along.  I’ve already found some to consider but don’t want to spoil the sequel to this adventure prior to a future post.

James Whelan

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