You're young, you get a part-time job, and you have 'earned' money in your pocket for the first time. What do you do? Without a doubt, the greatest temptation is to spend, spend, spend! … on designer duds, computer games, fast food and faster cars. And you just might do that - unless you learned good money handling habits while growing up.

That's why it's never too early for parents to begin teaching their kids about the value of money and the simple rules for financial stability through life. Yes, money should be enjoyed but, by taking a responsible approach, your kids will have money on hand to enjoy when they want it. So it's important for them to develop their 'hard' money skills by reading about debt, credit, income and investments, and by teaching them how to write a realistic budget and longer-term financial plan that aligns with the 'soft' money skills of achieving their life goals and dreams.

And it's never to early for youngsters to start investing. In fact, they may even have an advantage over an adult in making their money grow. This is because an adult's investment returns are usually subject to taxes (if outside a registered savings plan) while a child is unlikely to have a taxable income, so they can often retain all of their investment profits.

Which brings us to Registered Retirement Savings Plans (RRSPs). If a youngster doesn't make enough money in a year to pay taxes, it would seem to make little sense to invest in an RRSP for the purpose of reducing taxes - and that's true … if you're thinking short term. But, there's still a very positive place for RRSP planning in your child's life - here's why:


Youngsters who work should file their own income tax return, regardless or whether they will pay tax. This enables the youngster to build up RRSP contribution room, which can be carried forward indefinitely. That contribution room can be 'filled' when the youngster becomes a higher-earning adult and his or her tax rates are higher. So, in effect, a non-taxed youngster who reports every penny of income is actually benefiting by maximizing their ability to make future RRSP contributions.

Alternatively, a youngster can contribute to an RRSP during his or her non-tax-paying years and wait to claim the deduction in a tax-paying year. RRSP contributions do not have to be claimed in the year they are made, but can be carried forward indefinitely. As a consequence, your youngster enjoys the immediate benefits of tax-sheltered growth and the ability to make the most of the contribution deduction in his or her future tax-paying years.
To invest in an RRSP, a child must have a social insurance number, and RSP contribution room based on 18 percent of their previous year's 'earned' income (money made from employment and reported on an income tax return before deductions).

It's important to teach your kids about money and investing - and it's important that you know the best ways to invest for yourself and your family, as well. Your financial advisor can help suggest suitable RRSP and non-RRSP strategies for everybody in your family.

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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada