Anyone with the financial wherewithal and foresight to contribute to an RRSP before the age of 20 will be miles ahead financially when it comes time to retire. However, young people aren’t going to act in their own best interests without parental guidance on early retirement planning. Advisors can strengthen their client bonds — and plant the seeds of a relationship with the next generation — by talking to parents about how they can assist their teenagers with useful financial strategies.

“The early establishment of a financial vehicle to create wealth for the younger generation has lifelong benefits,” says Sandy Cardy, vice president of tax and estate planning at Mackenzie Financial Corp. in Toronto. “Kids don’t realize the magnitude of it, and they need to be encouraged.”

There’s no minimum age when children can start accumulating RRSP room, providing they are legitimately earning income. Mowing lawns, babysitting, lifeguarding at the local pool and caddying at the golf course can add up to significant RRSP room over the years. If income is recorded on annual tax returns with proper receipts, the RRSP room starts to build up, based on a contribution limit of 18% of earned income.

A tax return can be filed on the child’s behalf by the parents so a record of income is officially established, says Jamie Golombek, vice president of tax and estate planning at Aim Funds Management Ltd. in Toronto. A social insurance number is needed for the Canada Revenue Agency to track the child’s income and RRSP room, and can be obtained any time after birth as long as the child has a birth certificate, he says.

Parents who own businesses can also help their children earn money by giving them jobs and paying them appropriately.

“People with their own businesses have a great opportunity for income-splitting by paying the child a salary for tasks performed after school and on weekends,” Cardy says.
“The salary is a tax-deductible business expense, and creates RRSP room for the child.”

The salary must be in line with the job, and the work must actually be done. A rule of thumb is to pay the child what you would pay a third party to perform the service, providing the child is capable.

“A child can easily start earning money around 11 or 12 years of age,” says Gena Katz, senior principal at Ernst & Young LLP in Toronto. “Allowance doesn’t cut it; there must be an actual record of income with the tax authorities before RRSP room can be established. However, a child can build up room for several years before actually making a contribution, or deducting it from annual income.”

It is unlikely that the child will be in a position to benefit from a tax deduction, as any annual income under $8,148 is tax-free, but he or she can still make an RRSP contribution that will start growing. The RRSP deduction can either be used now or carried forward to a future time when the child is earning enough taxable income to make the deduction worthwhile.

“Once RRSP room is established, there is no time limit on when an RRSP contribution must be made or when it must be claimed as a deduction, but the sooner the money is in the RRSP, the sooner it can start growing and compounding,” says David Ablett, manager of advanced planning support at Investors Group Inc. in Winnipeg.

Although the CRA has no problem with a child opening an RRSP, not every financial institution is willing to accommodate children. Typically, banks will allow a minor to open an RRSP, but until the child reaches the age of majority, some banks restrict the RRSP’s holdings to savings accounts and guaranteed deposits. Some fund companies and investment firms allow a minor’s RRSP to invest in higher-growth opportunities such as mutual funds if a parent is a co-signer on the account.

Even if the size of a child’s RRSP is limited by skimpy earnings, once he or she is 19 years old, the Income Tax Act permits a $2,000 RRSP overcontribution penalty-free (see page B6). Parents may want to help teenagers come up with this amount as an initial RRSP boost, and encourage the kids not to touch the money until they collapse their RRSPs at age 69. A sum of $2,000 growing at 8% a year would amount to more than $43,000 at age 69 after 50 years of compounding. The same $2,000 put in 10 years later,
at age 29, would grow to $20,000 by age 69.

@page_break@There’s no disputing the benefits of starting young, and many middle-aged people seeing retirement approaching wish they had started saving earlier. But most parents have difficulty getting teenagers to save. There are much more pressing things to do with money when a teen first sees a paycheque, and if he or she is motivated to save, it is typically for items related to current interests, such as an iPod or a car.

“It’s tough to put an older head on a young person’s body,” says David Salloum, a certified financial planner with RBC Dominion Securities Inc. in Edmonton. “Teenagers may not even know what ‘RRSP’ stands for, so it’s important to talk to them about investing in language they understand.”

Advisors say it helps to start the savings habit when children are young, so they see at an early age how compounding makes money grow. An in-trust account that children observe as they’re growing up is a great way to teach this lesson. It also serves as a handy place to put birthday money, and can lead to conversations about investing and market behaviour.

The time to introduce the idea of an RRSP is as soon as a teen starts earning money, says John Klaas, assistant vice president of training and financial services at MD Management Ltd. in Halifax. But, he cautions, teenagers may not want to take advice from parents at this stage. He suggests it may be a better idea for the financial advisor or a respected family friend who can “sing the praises of starting early” to talk with the teen. And, if the parents offer to match contributions, it may provide an incentive to the teen to contribute some of his or her own money.

Klaas also suggests parents make the process as painless as possible, by helping with the paperwork or accompanying the teen to set up the RRSP.

He also counsels patience. The teenager may not put money away, or may even withdraw it for something that seems more pressing. The RRSP idea may fall flat the first time it’s tried.

“There’s nothing like setting up a regular contribution plan for $25 a month or so. It helps get things rolling,” Klaas says. “And if it doesn’t work the first time, keep trying. There are many years ahead. It’s important not to give up.”

Web sites can be useful sources of information and allow a young person to learn independently, without being preached to. The Financial Planners Standards Council recently enhanced its online section called “Educating youth,” adding an “Ask an expert” feature that allows young people to e-mail their financial planning questions to a rotating panel of certified financial planners for professional responses. The FPSC is also offering an updated edition of its financial planning tool kit for Canadians aged 15 to 25. Called Focus on Your Finances, the kit is available online at www.cfp-ca.org and in print.

When RRSP financial statements arrive at the house, it is a great opportunity for parents to engage the teenager in discussions about how the investments are doing, Klaas says:
“The RRSP can provide an opportunity to discuss subjects such as short-term volatility and the importance of a long-term perspective. It’s a great learning opportunity and will stand the child in good stead when he or she has more money to invest down the road.”
IE