Parents are often more than willing to help their adult children financially – whether it’s getting ahead with an education, buying a first home, or with financial hardships such as a job loss or business failure.
But the economic fallout from COVID-19 has many parents pulling funds out of their savings particularly to help children who have lost work and need income, or have recently graduated and can’t find a job.
“It’s a hot topic right now,” says Jamie Golombek, managing director, tax and estate planning, at Canadian Imperial Bank of Commerce in Toronto. “With the COVID-19 pandemic, helping with daily expenses, loss of a job, is absolutely a priority – and parents who are in a fortunate situation are more than happy to do so.”
Whether providing the money as a loan or gift, parents need to make sure they can afford to pull the funds from their portfolios.
“Parents naturally want to help their kids, but they have to help themselves first,” says Dan Bortolotti, portfolio manager at PWL Capital Inc. in Toronto, who has talked parents out of helping their kids in the past.
“It’s not a value judgment,” Mr. Bortolotti says. “You might run out of money and you can’t sacrifice your own future for your kids’ future. Also, they have more time [to earn income]. You have to be careful that you don’t jeopardize your own future.”
Mr. Golombek says parents who want to help their kids can do so without worrying about your own financial well-being if they have “never money – [that is], money you never need in your lifetime.” Still, he urges parents to get expert advice before transferring funds.
“The first person someone should turn to before making a gift is their financial advisor,” Mr. Golombek says.
How to give
Canada has no limit on the amount parents can give their children. For those who have the money available to give, Mr. Golombek says the best place to pull it from is their cash reserves because there are no tax consequences to doing so.
“It’s the easiest way to give,” he says. “It gets more complicated if you want to give away securities … because that would be a deemed disposition at fair market value.”
For parents who don’t have the cash available, Mr. Golombek recommends turning to the tax-free-savings account (TFSA).
“The nice thing about the TFSA is that it’s a general-purpose account, [it’s] not just for retirement,” he says. “When you take the money out it’s done so tax-free... and you can recontribute the money in a future year. The only thing you’re giving up is the tax-free compounding in the plan.”
He says it becomes more complex if the money is taken from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF) because those accounts do trigger taxes when money is withdrawn.
“The other downside is that you can’t recontribute,” he says. “If you’re over 71 and taking money out of a RRIF, of course, you can never put it back. If you’re under 71 – and still have an RRSP – you have to have earned income, which generates new contribution room to put it back in.”
Another avenue for parents looking to help their kids is to borrow. A home equity line of credit, for example, could be an option worth considering.
“Interest rates are at rock bottom right now,” Mr. Golombek says. “Maybe they need or want to tap into that as a last resort to help out the kids. Of course, the problem is they’ll have to pay interest but, again, the cost of that interest is very low right now and if they can pay it back in a reasonable time, I don’t think it’s a terrible option.”
That approach might also be less stressful than taking money out of the markets, which are extremely volatile these days, says Mr. Bortolotti, although he admits “there may not be any other option [for some people].”
Mr. Bortolotti recommends parents source the money from accounts doing “very little for [them],” such as high-interest savings accounts or guaranteed investment certificates (GICs), which have low returns of about 1-to-2 per cent, depending on the term.
An educational opportunity
For children who lost their jobs and are looking for a career change, Mr. Bortolotti says parents might consider paying for their education – or at least pitching in to help cover some of the costs.
“For a lot of people, the pandemic has been an opportunity to hit the reset button,” he says.
Parents loaning or gifting money to their kids should also use the event as an opportunity to educate them more about their personal finances, says Rona Birenbaum, founder and certified financial planner at Caring for Clients, a fee-for-service financial-planning firm in Toronto.
Depending on the children and their circumstances, Ms. Birenbaum says parents might also ask their kids to show them a budget as proof of how their managing money – or work with them to develop one.
“One of the best ways you can help your kids is to educate them and to improve their financial literacy so they can get in control of their money,” she says. “Otherwise, you’re just throwing money into a pit that never ends because there isn’t the awareness there.”
Ms. Birenbaum recommends parents develop a 12-month financial plan with their kids, including the best- and worst-case scenarios for income – and how they plan to cover their regular expenses.
“Then, mom and dad can decide if they want to fill the gap financially, and what the terms of that will be,” she says. “I would suggest to the parents not to just hand money over because it feels like you’re fixing it and don’t want to force the kids to talk about money. It’s never too late to teach good money habits. There are even some very well-to-do people who don’t have the knowledge.”