Two Ways to Kickstart your Child's RRSP Account

Most people find out later in life just how important it is to start saving early. Here are two strategies you can use to help your children start saving early.

YOU CAN SET UP YOUR CHILD’S RRSP AS SOON AS THEY FILE THEIR FIRST TAX RETURN

You may have thought that you have to be 18 to set up an RRSP, but there is no minimum age restriction. The only requirement is that you have generated RRSP contribution room by claiming earned income – which can be done by filing a tax return. Some people choose not to file tax returns for their children because they may not be earning enough income to have to pay taxes. While that may be true, by filing a return for them nonetheless, you can start generating RRSP contribution room. Every little bit helps. Let’s look at what $100 dollars grows to in progressively longer intervals (assuming a 10% rate of return).

10 Years = $259
20 Years = $673
30 Years = $1,745
40 Years = $4,526
50 Years = $11,739
60 Years = $30,448

So for those who are self-employed and pay their children a nominal wage to lick stamps for the family business, it is quite possible for a 10 year old to have generated some RRSP contribution room. In this case, for every $100 they contribute, it will equate to roughly $30,000 by the time they have to convert their RRSP to a RRIF account. Mind you, if we averaged 2.5% inflation during this whole time that $30,000 will only buy you $7,665 worth of stuff in today’s dollars! Nonetheless, it’s better than not having that money AT ALL isn’t it? :)

YOU CAN TAKE ADVANTAGE OF THE $2,000 RRSP OVER-CONTRIBUTION LIMIT STARTING THE YEAR YOU TURN 19

LearningGraduation.jpgWhile there is no minimum age to set up an RRSP account, you cannot take advantage of the $2,000 overcontribution limit until the year the RRSP owner turns 19 years of age – in other words, you have to be 18 on January 1st of that tax year. So even though your child may not have built any significant RRSP contribution room through gainful employment, the year they turn 19 you can still deposit a lump sum of $2,000 to their RRSP over and above their contribution room at this time. Let’s see what this present might look like by the time they convert their RRSP to a RRIF account at age 71 (again assuming a 10% rate of return):

$2,000 Overcontribution at Age 19 = $312,494.45 at age 71

If we again factor in an inflation rate of 2.5%, the spending power in today’s dollars works out to $92,401. Close enough in my books to say that a $2,000 gift when your child turns 18 is worth about $90,000 to their retirement.

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 2 comments
  • Pat O'Dell

    I am wondering how a child under the age of 18 can set up their own RRSP because they can’t sign a contract until they’re 18. Or, is this RRSP set up by parents/legal guardians and signed on behalf of their child?

    • Karn Sihota

      Pat, a child under the age of 18 (or 19 depending on your province) cannot setup a RRSP contract nor can the parents sign on behalf of their child. The only benefit of filing taxes would be so your RRSP contribution room builds up as it can be carried forward indefinitely. So as soon the child reaches age of majority, they can contribute to RRSP based on their pervious carry forward contribution room.