Welcoming a new child is an exciting and life-changing event, but it also comes with major financial considerations. For parents in both Canada and the United States, the early years of a child’s life are a critical window for tax-efficient savings, thoughtful estate planning, and long-term financial security.
In this comprehensive guide, we explore the key education and investment accounts Canadian and U.S. parents should consider opening for their child, such as the Registered Education Savings Plan (RESP), in-trust accounts, 529 plans, and custodial accounts like UTMA/UGMA. We’ll also highlight essential steps in reviewing your estate plan, insurance coverage, and overall cash flow as your family grows.
Key Financial Accounts for New Parents in Canada
Registered Education Savings Plan (RESP)
The RESP is the cornerstone of education savings in Canada.
How It Works:
- Parents, grandparents, or other contributors can open an RESP for a child.
- Contributions are not tax-deductible, but growth inside the plan is tax-deferred. There is a $50,000 lifetime contribution limit per beneficiary.
- When withdrawn for post-secondary education, the income and grants are taxed in the child’s hands, typically at a low or nil rate. The original contributions come out tax-free.
Tax Advantages:
- The federal government provides the Canada Education Savings Grant (CESG), matching 20% of annual contributions up to $500 per year (on a $2,500 contribution), with a lifetime maximum of $7,200 per child.
- Additional grants and provincial incentives may be available for lower-income families.
Strategy Tip:
Start early—even small monthly contributions can grow meaningfully thanks to government grants and tax-deferred compounding. If you are a high-net-worth Canadian, run the math to see if you would be better off superfunding the RESP in the first year rather than making annual contributions.
In-Trust For (ITF) Accounts / Informal Trusts
These taxable investment accounts are often used when families want to gift funds to a child without the complexity of a formal trust structure.
How It Works:
- An adult opens an account “in trust for” a child.
- The account is legally owned by the adult (trustee), but the funds are intended for the child and become theirs when they reach the age of majority (usually 18 or 19, depending on the province).
Tax Implications:
- Attribution rules may apply: income from capital (dividends, interest) may be taxed in the contributor’s hands, while capital gains are typically taxed to the minor child.
- This makes the account more tax-efficient if investments are focused on growth (e.g., equities, ETFs).
Risks and Considerations:
- Lack of control: funds legally belong to the child at the age of majority and can be used however they choose.
- No contribution limits, but no government matching or deferral like an RESP.
Formal Trusts for Minors
While less common due to complexity and cost, formal trusts are an option for high-net-worth families seeking control over how and when funds are accessed.
Advantages:
- Custom terms can restrict access until a certain age or for specific purposes (e.g., education, home purchase).
- Potentially favorable tax treatment if structured to distribute income to a lower-income beneficiary (the child), but one must also be aware of the attribution rules.
When to Consider:
- Large gifts or inheritances.
- Concerns about protecting assets from early misuse.
Key Financial Accounts for New Parents in the U.S.
529 College Savings Plans
The 529 plan is the most widely used education savings vehicle in the United States.
How It Works:
- States sponsor 529 plans, but you can generally invest in any state’s plan regardless of residence.
- Contributions are made with after-tax dollars, grow tax-deferred, and withdrawals for qualified education expenses are tax-free federally and in many states.
Tax Advantages:
- No federal deduction, but many states offer a deduction or credit for contributions.
- High contribution limits—often over $350,000 per beneficiary, depending on the state.
Qualified Expenses Include:
- Tuition, books, room and board, and even up to $10,000 per year for K–12 private school tuition (state-dependent).
- Up to $10,000 in lifetime student loan repayments.
Strategy Tip:
Use “superfunding” to front-load five years of contributions (up to $95,000 per child per parent in 2025) without triggering gift tax. If there are unused 529 amounts after your child is finished with school, these can typically be transferred to another related child, invested for future grandchildren, or up to $35,000 (2025) can potentially be transferred to your child’s roth IRA to grow tax-free.
UTMA/UGMA Custodial Accounts
The Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) accounts enable gifts to be made to a child while maintaining adult oversight.
How It Works:
- The account is opened and managed by an adult (custodian) until the child reaches the age of majority (18 or 21, depending on the state).
- At that point, control of the account transfers to the child outright.
Tax Implications:
- For 2025, the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and the amounts above are taxed at the parent’s rate (the “kiddie tax”).
- No tax deferral; income and realized gains are taxed annually.
Advantages:
- Can be used for any purpose benefiting the child (not just education).
- Simpler and more flexible than a trust, but with less control once the child reaches adulthood.
Limitations:
- Assets count against financial aid eligibility.
- No tax-free growth like a 529 plan.
Comparing Canadian and U.S. Accounts
| Feature | RESP (Canada) | In-Trust Account (Canada) | 529 Plan (U.S.) | UTMA/UGMA (U.S.) |
|---|---|---|---|---|
| Tax-deferred growth | ✅ | Partial (gains only) | ✅ | ❌ (annual taxation) |
| Government incentives | ✅ CESG (up to $7,200) | ❌ | ✅ (state-level) | ❌ |
| Control at age of majority | ✅ if not withdrawn | ❌ | ✅ remains owner-controlled | ❌ (child takes control) |
| Use restriction | Education only | Any purpose | Qualified education only | Any purpose |
| Annual contribution limit | None (lifetime $50,000) | None | Varies by state ($350k+) | None |
| Impact on financial aid | Moderate | Moderate | Favorable | Unfavorable |
Key Milestones for Financial Review After a Child Is Born
Having a child changes your financial landscape. Here’s a checklist of planning areas that deserve immediate attention:
Estate Planning
Update Wills and Beneficiaries:
- Ensure guardians are named for your child in your will.
- Update beneficiary designations on life insurance, RRSPs, IRAs, or 401(k)s.
Consider a Trust:
- Establishing a testamentary or living trust can help control when and how assets are distributed to your child in the event of your death.
Review Powers of Attorney:
- Ensure you and your partner have valid powers of attorney for property and health care.
Insurance Needs
Life Insurance:
- Essential for income replacement, paying off debts, and funding education.
- Term insurance offers affordable coverage aligned with child-rearing years.
Disability Insurance:
- Often overlooked but critical; your ability to earn income is one of your biggest assets.
Health and Critical Illness Insurance:
- Consider enhanced coverage, especially if relying on employer plans.
- In Canada, some families add private health insurance to cover gaps not included in provincial plans.
Child Life Insurance (Optional):
- Some parents purchase small policies for children that can later be converted to adult coverage regardless of health.
Childcare and New Expenses:
- From diapers to daycare, costs add up quickly. Update your monthly budget and track variable expenses.
Emergency Fund:
- Consider increasing your emergency savings buffer to cover 3–6+ months of expenses in case of job loss or health issues.
Saving for Multiple Goals:
- Prioritize retirement savings before overfunding education. Your child can take out student loans—your retirement can’t be borrowed.
Cross-Border Considerations for Dual Citizens or Moves
If one parent is a U.S. citizen living in Canada—or if a family moves between the two countries—planning gets more complex:
RESP and 529 Plan Compatibility:
- A U.S. person in Canada should be cautious with RESPs, as they may be considered foreign trusts by the IRS and trigger reporting (Forms 3520/3520-A).
- Similarly, 529 plans are not recognized in Canada and may not receive favorable tax treatment for Canadian residents.
Reporting Requirements:
- In-trust and custodial accounts can trigger foreign reporting (e.g., Form 114 FBAR, Form 8938) if held by U.S. citizens abroad.
Professional Advice Needed:
- Work with a cross-border financial advisor to determine the best mix of accounts and structures for your family’s unique situation.
Conclusion
Raising a child brings joy, responsibility, and a pressing need for financial foresight. Whether you live in Canada or the U.S., starting early with the right accounts—RESPs, 529s, in-trusts, or UTMAs—can pave the way for your child’s future.
But financial planning goes beyond just saving: updating your estate plan, insuring your income, and managing cash flow are equally important steps in building a secure future for your growing family.
At Cardinal Point Wealth Management, we specialize in cross-border and high-net-worth financial planning for families on both sides of the border. If you’re welcoming a new child and want to ensure every financial angle is covered, reach out to our team for a personalized consultation.