Category Archives: on Saving Money

Sound guidance, sage advice and helpful tips about money from Jamie List, Financial Planner, Investment Manager and HeadsUp Dad Money Expert.

The Registered Education Savings Plan – A primer

The Registered Education Savings Plan, or RESP, is likely the best opportunity that a parent (or other relative) can establish to contribute to a child’s future education, and to help with the parents’ financial planning into the future.  Here are some things that you should know:

  • Almost anyone can deposit money into an RESP, as long as the parents agree
  • The money deposited into the plan grows tax free
  • The money deposited into the plan gets a government grant
  • You can invest it how you choose, or with the help of a qualified investment professional
  • The funds in the plan can be used for a wide range of post-secondary education, such as university, college, trade school or other programs that may qualify
  • If unused, the a portion of the balance of the RESP may be transferrable back to the parents later in life

So – sounds like a good deal?  It is.  The government established this program to encourage parents to save for their children’s future, and the government grant program (the Children’s Education Savings Grant, or CESG) creates a powerful incentive.  Here are the rules:

  • You can deposit up to $2,500 each year to get the “current year” grant, or 20 cents per dollar, per child.
  • You can deposit a lifetime maximum of $50,000 into the plan, per child.
  • You can receive a maximum of $7,200 of grant, per child, by the year in which they turn 17.
  • Note that there are special rules for beneficiaries (i.e. the kids) on the plan who are 16 or 17 years old, so consult a professional to discuss if your older child qualifies
  • There are added benefits for families with family incomes as described below:
    • incomes of less than approx. $77,000 there is an additional GESG incentive of $50 for the first $500 deposited
    • family incomes less than approx. $38,000 there is an total additional GESG incentive of $100 for the first $500 deposited in addition to qualifying for the Canada Learning Bond, which is $500 in the first year your family qualifies, plus $100 each year after

The math is fairly good for in favour of starting this plan.  If you look at the grant as free money (which is it), you are getting an automatic 20% return on the first $2,500 you put into the plan each year, and that grows tax-free.  In the current market, that seems a fairly strong argument to use this structure to plan for the future!

Tax Free Savings Accounts

The government of Canada gave us Canadians another tax savings option in the 2008 federal budget that will go far in helping Canadians accumulate wealth in a tax-effective manner.  The Tax Free Savings Account is quite simple, and the features of the plan are as follows:

  • It is open to all Canadians over the age of 18, and continues for life.
  • The maximum contribution into this plan will be $5,000 per year. That amount will be increase with inflation in increments of $500 in future years.
  • There is NO tax deduction available for deposits.
  • All income and growth is exempt from taxation, even on withdrawal.
  • Unused contribution room can be carried forward.  If you make a withdrawal, the amount withdrawn can be replenished to the account in subsequent years without any penalty.
  • As with an RRSP, the plan contemplates spousal contributions without affecting the contribution room of the spouse receiving the spousal contribution.
  • TFSA can then be used for whatever purpose at whatever time. (buying a house, paying for a wedding, starting a business, etc.).

We think that every Canadian over the age of 18 should have this account. For the time being, your TFSA balance will be small, and that will limit your investment options, but it is a great place to hold any extra cash – since the account has no penalties to your “room” when you withdraw, you can move funds in and out without penalty.  And, with interest rates at record low levels, we need all the help we can get on interest savings after tax and inflation are taken into account.

Here are two strategies that you can implement in the future:

  • Lower income taxpayers: for taxpayers who are saving their money while earning a lower income, the TFSA is a better deal than the RRSP (i.e. for the spouse during maternity leave). This is because the positive effect of the RRSP deduction is less if the taxpayer has a lower income tax rate (lower tax rate = lower amount of tax back from your RRSP deduction). If an individual is in a situation where they expect to be earning more in the future, then the TFSA would be a far better choice, and the taxpayer could carry forward RRSP room for future deductions, hopefully at higher tax rates.
  • Funding Education for Adult Children: parents might consider funding more of a child’s education on the agreement that the adult child save the equivalent amount in their TFSA. This would allow the parents to take all relevant deductions and credits for funding their children’s education, and it would allow the children to begin to accumulate savings in their own TFSA. They are likely earning a very low income as a student, their contribution to the TFSA will come at a very low after‐tax cost.
  • All in all, I think that the TFSA is a good move for Canadians. If for no other reason, it simply provides you with another planning tool. If the tax benefits are not enough to persuade you, then the added planning options and flexibility should.