Readers of this blog know I have three children, two adult boys and one teenage girl. Like many of you, I struggle with some parenting issues, but perhaps the most challenging is how to teach my kids about money (yes, it’s even challenging as a financial advisor!).
The good news is, I have a plan that I believe will help us all be better at educating our children about financial responsibility, saving and investing.
But before I explain, let me share a quick story…
Years ago, I took my eldest to buy a pair of running shoes and gave him a budget for his purchase—let’s say $100 for the sake of this blog. I believed the budget to be enough to purchase a good shoe, but not necessarily the “coolest” shoe with the name a basketball star stitched on the side.
As we approached the running shoe display, my son’s eyes opened wide and his jaw dropped. He looked like he had just walked into Santa’s toy factory.
The store had basic shoes and mid-range shoes, but the majority were awfully expensive and connected to high-profile athletes. I reminded my son of his budget and left him to ponder his options and select something appropriate.
As you might expect, he couldn’t find a shoe that fit his budget. In fact, the only shoe he liked (or should I say, “absolutely needed”) had a price of about $250.
He started negotiating the budget with me (and he’s a very good negotiator, even today), but I stood my ground. Finally, he suggested visiting a discount shoe store for better prices and I agreed.
Unfortunately, he didn’t find the shoe at a better price, so we had a father-son standoff. Eventually, I concluded the negotiation by saying he could buy shoes that fit our budget, or he could continue wearing his current shoes.
He didn’t buy new shoes that summer and instead wore his old shoes right into the fall. But I hoped he learned a lesson about budgets.
Today, my children are much older and lessons are harder to teach. But I have a plan for how we can teach our adult children about money.
The plan’s background
Many readers have investments in their non-registered plans (cash accounts) and a willingness to gift their children small amounts of money, if it helps them learn about finances and save for their future.
Allow me to introduce the Tax Free Savings Account (TFSA), a registered account that permits an annual contribution of $6,000 (2021 limit) an accumulative contribution limit of $75,500 (as of 2021).
Contributions to TFSAs are made with after-tax dollars but the funds grow tax free while in the plan. Let me say that again: MONEY IN A TFSA GROWS TAX FREE!
And it gets better…
When the money is withdrawn (e.g., for retirement), there’s no tax on the growth.
And it gets even better than that…
Funds can be withdrawn (tax free) and can be returned to the TFSA in the next calendar year, without any tax consequences.
Our principal residence has the same characteristics: it’s purchased with after-tax dollars, it compounds tax free and, when sold, any capital gains are tax free.
I don’t know how long the Feds will permit annual TFSA contributions (given the huge projected deficit), but I suggest, where possible, taking full advantage of one of the very few tax-favoured vehicles allowed to Canadians.
The plan
If Mom and Dad have maximized their RRSPs and TFSA contributions AND they have a few extra dollars in their non-registered accounts, then it’s time to transfer funds to their kids’ TFSAs.
I know what you are thinking: “Richard, have you lost your mind? We provided the kids with food, shelter, education (and running shoes), and now you want us to transfer money into our children’s TFSAs?”
Yes. That is exactly what I am suggesting…
Transfer money to your kids’ TFSAs!
Why does the plan makes sense?
By transferring money to our children’s TFSAs, we receive the following benefits:
- It provides an opportunity to begin a conversation with our children about money and share our money lessons.
- It allows us to witness, while we’re alive, how our kids handle money and offers a glimpse of how they may handle their inheritance.
- By opening up additional TFSAs, parents multiply the TFSA contribution limits (one for each child and/or in-law) and possibly increase the family’s net worth.
- TFSAs are “too good to pass up” and may not be available forever, so use them or possibly lose them.
How can the Dri Financial Group help you?
Introduce us to your children, and we will offer them the following services:
1. We will remove our minimum investment balance, so children can open a TFSA with any amount of money.
2. We will charge your children the same Wealth Management fee we charge Mom and Dad, regardless of how much they invest.
3. We will provide your children with a financial plan that includes a review of:
- Their employer health benefits and savings plans
- Tax minimization strategies
- Debt reduction strategies
- Methods of savings for educational expenses
- Their life and disability insurance coverage
- Their wills and powers of attorney
4. We will start family financial planning discussions to ensure a successful transition from one generation to the next.
I hope this blog helps you get conversations with your children started and helps them learn about managing money.
If you have questions or would like to discuss opening a TFSA for your children or grandchildren, please call our office for an appointment.
Never Retire Profile
As the CEO of Tesla and SpaceX, promoter of cryptocurrency Dogecoin, and one of the wealthiest people in the world, everyone has heard of Elon Musk. But what about Maye Musk? The 73-year-old Canadian-South African model and dietician is mother to three Musks: Elon, Kimbal and Tosca. The senior Musk was born in Regina, Saskatchewan, raised mainly in South Africa, and graduated from the University of Toronto with a master’s degree in nutritional science. Musk has been modelling for 50 years, appearing in Revlon ads and even a Beyoncé video, and in September 2017 became CoverGirl’s oldest spokesmodel at 69. In 2021, she was signed by Creative Artists Agency, and even more recently, she appeared on Saturday Night Live alongside Elon. Whatever your thoughts about the Musks, they are without a doubt an industrious family.
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