Evelyn Jacks: Investing Tips for Young Adults

Once all the members of your family — including minors and young adults — have filed their tax returns, you can turn your attention to teaching the next generation the long-term benefits of investing their returning social benefits and refunds wisely.

Contributing up to $5,000 to a Tax-Free Savings Account (TFSA) each and every year is one way young adults can build a tax-free pension for retirement. Investment income earned in a TFSA accumulates tax-free, which means that future withdrawals from the TFSA are not taxed. This is extremely powerful. Imagine, future generations not needing to pay taxes on their retirement savings! But to make this a reality, your young adults must make maximum TFSA contributions part of a disciplined annual savings program.

Contributing to a RRSP is also very important and may, in fact, come before a TFSA in order of investing if your adult children have net or taxable income and sufficient contribution room. An RRSP deduction reduces net income, which increases refundable tax credits (such as the GST/HST credit) and enables the transfer of tuition, education and textbook amounts. Putting money into an RRSP early not only helps your young adults reduce taxes but will also create a three-part savings plan — for home ownership, life-long learning and retirement — all within the same vehicle.

If you wish to add to your child's nest egg, you can generally loan funds for investment purposes to your adult child without invoking the Attribution Rules in Section 74.1 of the Income Tax Act, which attribute resulting interest and dividends back to the lender. But beware of Section 56 (4.1) of the Act, which can attribute income back to the lender if it is reasonable to assume that the lender made the loan, or the recipient incurred the indebtedness, to reduce or avoid taxes. The Section 56 (4.1) rules are broader than the Section 74.1 rules and relate to all income earned on transferred property. It's important to stay clear of the tax auditor. So, be sure to structure your affairs properly.

It's Your Money. Your Life. By filing audit-proof tax returns for all family members at the same time, starting with the lowest-income earner and moving to the highest, you can increase after-tax results for the family as a unit. Then, leverage any tax windfalls by teaching young adults the proper order for investing, so that they can maximize their opportunities to build tax-efficient, million-dollar futures with their tax-sheltered accounts.