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Tax-free Saving for Children: 6 Ways

Every parent desires to provide the best future for their child, but it may sometimes turn out to be an expensive affair. Managing food, books, camp, clothes, sports, and other expenses isn’t easy. According to an estimate, over 36% of parents in Canada are compelled to borrow money to meet the extracurricular activities expenses of their children.

It isn’t easy to save for the future financial security of your child with so many expenses already in hand. With the cost of post-secondary education increasing and housing prices soaring in various parts of Canada, it can be hard to meet all the financial needs for your child.

Fortunately, there are some tax-free ways to build savings for your children and secure their future. 

1. Child Plan ™ 

A Child Plan ™ Participating Whole Life Insurance Plan is one of the tax-free saving options for your children and doesn’t have any maximum or minimum investment limit. You can easily find plans suiting your budget. 

An average family in Canada contributes around $225 monthly or $2,700 yearly to their kid’s Child Plan. There are even families that invest as low as $100 and as high as $500 monthly to the plan. Check here to learn more about insurance for children. 

You can find a plan according to your individual’s budget and financial capacity. After the Child Plan is transferred to the child (beneficiary) they can use the withdrawals/benefits for education, paying down payment of their home, or any of their financial needs. 

  • The scheme can be opened by any legal guardian of the child, as early as when the child is just 14 days old. The contributions can continue even when the child crosses 18 years.
  • The policy offers a great deal of flexibility, as there are no rigid rules related to contribution. You can contribute as low as $100 per month.
  • You have the option to control the usage of funds, even after your transfer the account to your child.

2. Life insurance 

Life insurance is the only option where segregated funds are available in a secure investment option. One of its most significant advantages is that life insurance offers a death or maturity benefit up to 75% of the initial RESP investment, unlike mutual funds. However, the value depends on the coverage level chosen by you.

Life insurance comes with a cash value component that enables individuals to take various tax advantages. 

3. Open a Tax Free Savings Account to save for kids’ future goals 

Canada allows its citizens to open a TFSA or a tax-free savings account where the interest earned, capital gains, dividends, and contributions aren’t taxed. In addition, the amount can be withdrawn without paying any tax. The money collected in this account can be used for meeting the expenses of your child’s post-secondary education. 

Moreover, you can also use the saved money to access government grants like the Registered Education Savings Plan, where you won’t have to pay any taxes for the plan’s growth. Besides, no penalties are charged if your child chooses not to pursue a university education. 

In addition to funding your child’s education, the money collected in the TFSA is used for other purposes as well, such as wedding expenses of your child, down payment for their home, or maybe helping them start a business. However, keep in mind your child isn’t legally bound to use the money as per your desires.

Contribution limits in TFSA change from one year to another. 

4.  Registered Education Savings Plan 

RESP or the Registered Education Savings Plans is a tax-free money-saving option used by parents for handling post-secondary education expenses for their child/children. The money contributed to these plans isn’t tax-deductible. RESP withdrawals are also tax-free.

Note that the money earned on these accounts is taxable and known as Education Assistance Payments. 

5. Canada Education Savings Grants 

If you consider contributing to RESP to secure your child’s future, around 20% of your contributions can be matched through the CESG by Employment and Social Development Canada. In simple words, CESG contributions add 20% to the RESP contributions annually.

You can add a maximum of $2,500 to CESG contributions. The maximum amount of $500 can be added to your RESP every year. A CESG beneficiary may receive a lifetime limit of $7,200 for their contributions. However, if you qualify for additional CESG, the Canadian Government uses the adjusted income from the tax return to calculate the exact figure you may receive. 

Children that belong to low or middle-income families are eligible for an additional CESG amount. However, the eligibility depends on the adjusted income of the child’s parent or primary caregiver. It could mean an addition of 10% – 20% to the first annual contribution valuing up to $500.

Children receive the CESG contributions once they reach 17 years of age.

6. The Canada Learning Bond  

CLB is money added by the Government to an RESP (Registered Education Savings Plan) for children belonging to low-income families. The funds contributed in this bond are used to meet the costs of their part or full-time studies at: 

  • trade schools
  • apprenticeship programs
  • universities 
  • CEGEPs

Note: No personal RESP contributions are needed to receive the Canada Learning Bond benefits. 

The Canadian Government contributes an RESP of up to $2,000 for every eligible child. The contribution includes:

  • $500 – in the first year
  • $100 every year until the child is eligible to receive the benefits. It also comes with an additional benefit which the child receives when they turn 15.. 

Saving for Children

All of the above options come with specific pros and cons. So it is advised to weigh the features and benefits before signing up for any option. Also, make sure the option you choose suits your financial situation. “The monetary gift” that you are willing to give your child shouldn’t take a toll on your savings. 

Besides, get good legal and tax advice to make an informed decision, before choosing any of the above options including Child Plan ™ Participating Whole Life Insurance.

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