It’s never too early to start saving. In fact, recent studies indicate that children from low- and moderate-income families are far more likely to attend and graduate college if they have savings accounts. Keeping a savings account is a great way to teach your kids how to manage their money well, avoid bad financial habits and prepare for the future.
Youth savings accounts offer a number of features that make them ideal for young people looking to put away money for a rainy day. They encourage your child to save a certain amount each month and can help them achieve short- and long-term financial goals.
In most cases, there are no monthly account fees, but there may be a maximum age limit. This varies from bank to bank, but is usually between 16-19 years old. When your child turns that age, the account will likely automatically switch to a default savings account offered by the bank.
Make sure you know what type of account your youth savings account will default after your child reaches the maximum age. You may find that another account with different fees and features might suit your child better, so you may want to change the default account the youth account will switch to.
There’s also no minimum age requirement on most children’s bank accounts, meaning they can start saving as soon as you’re ready to set up an account.
However, banks usually impose an age restriction preventing children from opening an account themselves, so you’ll need to open it for them. You will need your identification, as well as your child’s, in order to do so.
Some commonly used savings accounts for youth
Youth savings account
Tangerine Children’s Savings Account
The age of the majority in the province where the child resides.
All are free and unlimited.
CIBC Advantage for Youth
All are free and unlimited.
Scotiabank Getting There Savings Account
Debit transactions are free and unlimited. You’ll also have 2 free Interac e-Transfers transactions per month.
You’ll get 0.05% on deposits up to $499.99, and 0.1% on deposits of $500 or more.
BMO Premium Rate Savings Account
18 when opened with a youth chequing account
It’s free with a $0 Kids Account, Plus Plan Chequing Account or a discounted Performance or Premium Plan Account.
You can share transaction limits with your chequing account.
Compare with regular savings accounts
How does a savings account work for my child?
Youth savings accounts function much like adult savings accounts – you make deposits to grow your funds and you’re limited in the number of withdrawals you can make. Some banks allow you to make a certain number of free withdrawals and then you pay for each one after that, while other banks charge a small fee for every withdrawal.
The benefits of this arrangement are two-fold: your child can make extra money over time due to compounding interest plus you’re actively setting aside funds that you may need in the future.
Getting your children to start saving when they’re young instead of waiting until they’re older gives them the advantage of having extra years to grow their money. This can really come in handy when it’s time for them to go to school, buy their first car, put money towards the purchase of a new home, pay for a trip, or plan a wedding.
Tax implications of youth savings accounts
Keeping your child’s funds in a youth savings account allows it to earn money on interest, but this interest is considered taxable income by the Canada Revenue Agency (CRA). However, if your child’s total income is below a certain point, he/she does not have to pay any federal income tax.
Because the federal government collects and remits income tax for all of the provinces and territories except Quebec, this also means your child won’t pay any provincial income tax.
The point below which income isn’t taxed by the federal government is referred to as the “basic personal amount” and is changed each tax year. The federal basic personal amount for 2019 was $12,069, which was up $260 from the previous year’s amount of $11,809.
Years ago, parents would give their children money in the form of corporate dividends, which were then used to pay for the child’s living expenses like private school and extracurricular activities. Between certain tax credits and the fact that children don’t usually have enough taxable income to begin with, parents could use these contributions to shift a significant portion of their income onto their children to avoid paying income tax.
But this changed in 2000 when the government changed the Income Tax Act, which made such dividends taxable.
Under section 120.4 (known as the “kiddie tax“) dividends sent from a private company to children under the age of 18 are taxed at the highest federal tax rate, so long as those children have a parent residing in Canada.
(To put it in perspective, the highest federal income tax rate for the 2019 tax year was 33%.) On a positive note, the kiddie tax does not apply to capital gains, and children can use the dividend tax credit to lower the amount of tax they owe. However, no other tax credits can be similarly used, including the basic personal amount.
If you intend to use your child’s savings account to house dividends from a private company, make sure you understand the tax obligations this will cause.
Must read: You could owe tax on money you give to your children
When you give money to your children as a gift, any interest earned by investing that money counts towards your income for taxation purposes – not your child’s – according to the CRAs “attribution rules.”
Money made from investing gifts to your children is considered “first-generation income” and is attributed to you, even if the investment is in your child’s name. Money subsequently made on the investment is considered “second-generation income” and counts towards your child’s income.
So, if you gift your children with money to put in their savings accounts, be aware that you may be on the hook for interest earned on those funds. One way to avoid this is to wait until your children are 18 to give them monetary gifts. Or you could put the money into an adult savings account under your name to let it grow interest and then transfer it to your children when they reach 18. Speak to a tax professional for more details and to find out what other options you may have.
Advantages of putting your child’s savings in an RRSP
You might still want to file an income tax return for your child even if the amount he/she earned from their savings account (and any other sources of taxable income) is below the basic personal amount. The reasons have to do with RRSPs and how they can help your child plan for the future.
Registered Retirement Savings Funds (RRSPs) are a popular way for Canadians to save for retirement. Funds put into these accounts can be deducted from your income and grow tax free. You only pay taxes when you withdraw funds in retirement. There is a yearly “contribution limit” on the amount you can put into an RRSP. Going over this limit will result in taxation and possibly forced withdrawal of excess funds.
Here’s why you should consider creating an RRSP for your child and declaring his/her income, even if it falls below the federal taxable amount:
You can make it easier for your child to save for retirement.
Each year, you can roll over any unused portion of your RRSP contribution limit to the following year. So the earlier your child begins to file a tax return, the more years’ worth of unused contribution room he/she can roll over. When your child is grown and making more money, he/she can stow a lot more away in an RRSP and subsequently reduce their income tax by a sizeable amount.
You can help your child save for his/her first home.
Up to $25,000 can be withdrawn from an RRSP for the purpose of purchasing a home for the first time. The earlier your child begins filing tax returns, the larger their contribution room will be in an RRSP, which will make it easier to put away money, grow it and then withdraw it when the time is right to buy a new home.
You can help your child save for retirement and school simultaneously.
Under the Lifelong Learning Plan, your child can withdraw funds from an RRSP tax free as long as the money is used for educational or training programs. Money has to be in an RRSP for at least 90 days before it can be withdrawn, and you can continue to withdraw until January, 4 years after you made your first withdrawal. You can only withdraw up to $10,000 in a calendar year and $20,000 altogether. Increasing your child’s contribution room and enabling them to make more substantial deposits to their RRSP can help them save for both senior living and schooling using the same tax-advantaged account. (Note that you cannot withdraw from your own RRSP to support your child’s education, so your child will have to have an RRSP of his/her own in order to take advantage of the Lifelong Learning Plan.)
How do I compare savings accounts for my children?
When deciding on which savings account to choose for your child, here are some factors to consider:
You may want to shop around for accounts with higher interest rates before making a decision. Some banks also offer promotional rates and other incentives, so it’s worth seeing what’s available.
There may not be any account maintenance fees for a youth savings account, but you should pay attention to any monthly withdrawal limits or fees.
Minimum opening deposit
Some youth savings accounts come with a minimum opening deposit — usually around $25 — so be aware of this if you’re looking for an account that doesn’t have this requirement.
The maximum age at which you can still hold a youth account differs across provinces and territories, but is usually 18-19 years old. Find out if your teenager is still eligible to have a youth savings account and take advantage of low/no fees.
How the account will change when your child exceeds the age limit
Banks will automatically convert youth savings accounts into an adult account when your child goes over the age limit. Find out what accounts banks default to and compare these with other adult accounts that are available. If you want your child’s account to convert to a different type of adult account, make sure you find out how to change this.
What are the pros and cons of opening a youth savings account?
Opening a youth savings account for your children can provide them with the following advantages:
Your kids can learn how to budget. Learning to budget is not just about teaching your kids to put their money away, but it also includes teaching them about spending needs and savings goals.
You can teach them about the economy. A children’s savings account will teach your kids about interest rates, inflation and how world events can impact their ability to save.
You’ll set your kids up for financial success. Research shows that kids who have any type of savings account are more likely to get a post-secondary education. These same children are also more likely to invest as adults.
To break it down even further, these are the good and potentially bad points you should consider when deciding whether to open an account:
Money can grow due to compounding interest. By making small deposits each month, a child’s savings account could earn a decent amount in interest.
There are usually little or no fees or extra charges. Many banks will make it easy on kids to save by not subjecting them to extra fees or charges when accessing the account.
You can open a savings account for children of any age, even babies. You can open a savings account for your baby as soon as you receive the birth certificate in order to take advantage of compound interest.
Your child could have to pay taxes on interest income earned in his/her savings account. Children’s savings accounts can still be subject to income tax if income earned through interest exceeds the basic personal amount declared by the government.
There’s an age limit. By the time children turn at least 18 or 19, they may no longer be eligible for the account. If your child is near the age limit, it may not be worth it to open an account for them as there may be a different investment vehicle that would provide better long-term yields.
Are there any traps to avoid?
Parents won’t have to worry about their child losing money with a savings account, as deposits of $100,000 or less are guaranteed if the bank is CDIC-insured. However, you should consider other risks that may come from managing a youth savings account. For example, if you want to save your own money in your child’s savings account, even if it’s intended to purchase something for your child, there may be tax implications.
These accounts are designed for your child only. Parents shouldn’t try to use children’s savings accounts to avoid taxes. If, during an audit, the CRA finds out you’ve been skipping out on paying your taxes, you could face serious penalties.
Your child can withdraw funds. As your child grows and is given more access to the account, they could fall into the habit of making frequent withdrawals from it. If you believe this may be an issue for your child, look into getting an account with limited access.
Promotions and introductory interest rates don’t last forever. The introductory interest rate may look good, but it’s likely going to revert to an average rate after a period of time. Be sure to read the terms and conditions closely before you commit to a product.
Opening a youth savings account for your child is an excellent way to begin teaching the basics of handling money and to prepare for future expenses. The earlier you begin saving, the more you’ll benefit from compound interest. When looking for the right account, consider the requirements for opening an account, minimum deposit and balance requirements, the interest rate and any fees that may apply.
Stacie Hurst is an editor at Finder, specializing in loans, banking products and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she completed one year of law school in the United States before deciding to pursue a career in the publishing industry. When not working, she can usually be found messing around with games, photography or floral arrangements in memory of her former days as a flower shop assistant.
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