You don’t need to empty the bank to help your children – or grandchildren – in a significant way. A tax-smart strategy is to give money that children can contribute to a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) or both, provided they have contribution room. It’s especially helpful when children are starting out and have difficulty making their own RRSP or TFSA contributions. By contributing now instead of years later, the investment will benefit even more from compound growth and become a considerable sum over time.
You may want to explain to your child that an RRSP tax deduction doesn’t need to be taken right away. Your child can defer the deduction to a future year when she or he is in a higher tax bracket and the deduction makes a greater impact.
Even if adult children are financially able to make registered contributions, this strategy is still a tax-smart way to transfer money to the next generation. You can fund the gifts with cash, so you’re not redeeming assets that trigger tax on capital gains. And your children are funding tax-advantaged investment vehicles. You might even consider making the gifts an annual practice.
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