What’s the best way to help a relative, financially?

Q. My nephew is 30 years old and works full-time in a close-to-minimum-wage job. He carries a mortgage on his condo and is able to save about $40 per paycheque. Periodically, he contributes to his TFSA but still struggles financially. I fear that he will not have saved sufficiently to fund a comfortable retirement.

He has no knowledge, nor any interest, in investment planning and strategies. He depends on his mother to make savings and investment decisions for him.

I have the resources and the will to fund a significant nest egg for his retirement (up to $50,000). I discussed this with his mother a year ago, but she never followed up so we could put together an investment plan.

I still want to help but feel blocked in making progress. What can I do?
–David

A. Hi David. It’s nice that you want to help your nephew, but it’s too bad you feel blocked from helping. I can’t give you relationship advice (that is for Ann Landers), but I can give you a few financial ideas.

First, I think your nephew is doing well on his income. He is making his mortgage payments and saving a little in a Tax-Free Savings Account (TFSA). From your description, he seems to be responsible with his money, but I recognize your concern is his retirement.

If you set up a retirement plan for him, will he spend the money before retirement, or will he keep it for his actual retirement?

If there is a risk that he may spend the money before retirement, consider these strategies:

• Keep the $50,000 yourself, invested in a separate account. Give your nephew the money when you feel he is responsible enough to manage it on his own.

If you have the contribution room, open a separate TFSA and hold the $50,000 in that account. (The total lifetime contribution limit as of December 31, 2019, is $63,500.) That way, there will be no tax implications for you.

If you don’t have the TFSA room, keep the money in a non-registered account. You will have to pay a little tax, but I get the impression you would be okay with that.

• You could set up a TFSA with an insurance company and purchase a segregated fund with your nephew as the owner of the account and yourself named as an irrevocable beneficiary.

With this setup, your nephew would not be able to withdraw money without your consent.

If you feel your nephew is responsible enough to keep the money until retirement, I suggest the following:

Set up a second TFSA in his name; he would know you are making contributions on his behalf, and together the two of you will make investment decisions. It sounds like you should be the one guiding him on investing, and it may be a fun thing to do with your nephew once a year.

You could deposit the full $50,000 in the TFSA or, just to be safe, make the annual maximum contribution, $6,000, until you have contributed $50,000.

David, your question revolves around your nephew having enough for retirement, so here are a few other things to think about:

• A single person with a low income will likely be better off in retirement with a tax-free income from a TFSA rather than a taxable income from a Registered Retirement Savings Plan and Registered Retirement Income Fund (RRSP/RRIF). This is because government supplements and credits are based on taxable income. A low taxable income qualifies for a higher guaranteed income supplement (GIS). This is why I didn’t suggest RRSP investments.
• With the recent changes to the Canada Pension Plan (CPP), your nephew should expect CPP to replace 33% of his current income, assuming his income holds steady.

Let’s take a snapshot of what his retirement picture might look like in today’s dollars if his current annual income is $30,000:

• Canada Pension Plan (CPP) would be $30,000 x 33% = $9,900
• Old Age Security (OAS), which is currently about $7,362
• Guaranteed Income Supplement (GIS), which is currently about $4,349

That is a total of $21,249 without any help from you, and likely with no more mortgage payments to cover. With the age tax credit available to him at age 65, he will be paying less income tax. Plus, there are currently a few other small provincial benefits that would be available to him.

All this is to say that his standard of living may not change much in retirement.

Again, I think it is a great thing that you want to help your nephew and hopefully guide him through his investment decisions.  Keep in mind he is only 30 and has lots of time to figure it out on his own. But even if he doesn’t, he is probably still going to be able to afford his current lifestyle. That should give both you and your nephew some peace of mind.

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected]

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

MORE FROM ASK A CERTIFIED FINANCIAL PLANNER:

• How much should you give to charity?
• What’s the best time to transfer a TFSA between institutions?
• How should I invest a $60,000 inheritance?