Dear Expert:
My son is 15 years old and has $887 of RRSP room from his last year's tax return. He has earned another $9,000 in income this year. Is he allowed at his age to use his RRSP room now? Also, is he allowed at his age to invest his other savings into mutual funds? If not, what can he invest in, as he is getting virtually nothing in interest right now.Expert Opinion:
Yes, he can use his RRSP room and make a contribution to a plan. However, with this amount of income, he is barely paying any income tax and even if he does pay tax he is paying at very low rates. He may be better off simply keeping his cash outside his RRSP until he starts working full-time and is earning higher income, and save the RRSP contribution for when he reaches a higher tax bracket, which will award him a better tax refund.
In addition, an RRSP is not usually considered a "liquid" investment since if he needs cash he must withdraw funds from the plan and create taxable income in the process. Given his age, he may have some other uses for his savings in a few years (education, purchase of car, starting a business, etc.) and likely would appreciate access to these funds.
As he is not the age of majority, he would be required to have you hold any mutual fund assets in trust for him. He could however purchase cashable GIC investments directly or use a high interest saving account. Again, if funds might be required in a couple of years, it may not make sense to commit them to "traditional" investments such as balanced funds or equity funds right now. If markets were turbulent just when he needs the money, he would be forced to cash in just as his investments had been eroded in value.
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator
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