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Retirement Never too young: How RRSPs can benefit children later in life

A child puts coins into a yellow piggy bank.

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While his pals were blowing their allowance on toys and candy, Paul Lermitte was saving the money he earned delivering newspapers. He was eight years old when he bought his first Canada Savings Bond.

"Most kids think about spending rather than saving," recalls Mr. Lermitte, who is now in his 50s and works as a Vancouver-based financial planner specializing in families that own businesses. "I guess that made me unusual."

Many young Canadians today earn some kind of income, whether it's from babysitting, working as a lifeguard in a community centre, or delivering papers, as Mr. Lermitte once did. Statistics Canada says almost 40 per cent – or more than 822,000 – of Canadians aged 15 to 19 years old are employed.

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They're likely not earning much, given that almost 75 per cent are employed part-time. But regardless of the size of their paycheques, money experts say it's important for these working youngsters to start saving part of their wages.

Should some – or all – of these savings be placed into an RRSP?

That's not a bad idea, says Sam Sivarajan, head of investments for Manulife Private Wealth, part of Manulife Financial Corp.

"Getting an early start with an RRSP means that by the time you're 26, you would have maybe 10 years of accumulation that would have grown reasonably nicely," he says. "An RRSP is probably the one freebie that the government gives – everybody should take advantage of it."

Yet Canadians often overlook RRSPs when they're thinking about savings for young people. One reason for this, says Mr. Sivarajan, is the common misconception that you have to be 18 to open an RRSP account.

In fact, there's no minimum age for an RRSP account; with the exception of brokerage accounts, a minor can set up an RRSP with a letter of consent from a parent or legal guardian, who retains signing authority until the child or teen turns 18 years old.

In order to make contributions to an RRSP account, a minor needs to have earned income the previous year and filed an income tax return with Canada Revenue Agency. This creates RRSP contribution room, which works out to 18 per cent of the previous year's income up to a certain maximum determined by CRA. The maximum for 2013 is about $24,000.

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Mr. Sivarajan says that in many cases, it may make more sense to let the contribution room sit unused and to start putting money into an RRSP when incomes are higher. But he also acknowledges that starting an RRSP early isn't entirely about tax planning; it's also about learning to save at a young age.

"It teaches kids to take personal responsibility for their own personal finances," he says. "It's an opportunity to talk to them about what an RRSP is, and how they can plan their finances properly."

Stephen Reichenfeld, vice-president at Calgary-based Fiduciary Trust Canada, part of Franklin Templeton Investments, says another smart tactic for young people is to contribute to an RRSP today but save the tax deductions for a higher-income year.

"If you're only earning $12,000 a year you will have contribution room, but you won't pay any tax anyway," he says. "So there's no point in claiming that tax deduction today."

But it does take foresight and good record-keeping to make this strategy work. Today's teenaged RRSP contributor, for example, needs to remember those unclaimed tax deductions years into the future. It also takes a lot of discipline to not claim those tax deductions – and that nice income tax refund – today.

Betty Manalo, a Toronto-based financial consultant with Investors Group Inc., says young Canadians need to understand their short- and long-term needs before putting their money into an RRSP.

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"Will they need that money over the next few years, maybe to buy a car or to pay off credit card debt?" she asks. "An RRSP is a nice way of saving, but you have to have the discipline to not withdraw the money, because if you do, then that becomes taxable income and you've also lost that contribution room."

Non-registered investments are probably better for young people who'll need to get at their money in a few years, says Ms. Manalo.

"A TFSA would also be a good alternative for them," she says.

Tom Hamza, president of Toronto-based Investor Education Fund, a non-profit organization funded by the Ontario Securities Commission, says young people with income may be better off saving their money for university or college.

"If you're going to be graduating with $30,000 worth of debt, then that's what you need to attack first," he says.

Mr. Lermitte, who leads young-adult financial boot camps and has written several personal finance books for parents and young Canadians, says starting an RRSP in your teen years can really pay off when you're ready to buy your first house or condo. Under the Home Buyers' Plan, Canadians buying their first home can make a tax-free RRSP withdrawal of up $25,000 and repay it over 15 years.

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"So if you're 17 years old and thinking, 'Wouldn't it be nice to get my own condo when I'm in my mid-20s,' then start putting money into an RRSP and get that $25,000 in there," he says. "If you can do that, then you would be just that much more ahead of the game."

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