RRSP, TFSA, and RESP

4159 Views 7 Replies 6 Participants Last post by sprocket1200, Aug 22, 2009

eddieparker

Discussion Starter · Jul 24, 2009

Hello!

I come to you with a question.

Our situation is that we're currently in our late twenties, and we haven't maximized our RRSP's (although we have maximized our TFSA for this year).

We are thinking of starting a family in the next year or so, and I simply assumed we should open up an RESP immediately and start contributing to that as well. However, in reading one of the Canadian money blogs lately; they raised a good question about whether it's smart to divert cash away from your retirement money towards your child's education.

As such, I'm starting to think our goal should be to maximize our RRSP's/TFSA's first in the next few years, and once those are complete, switch over to RESP's for the kids. The thought process being that we should be fully invested in under five years and then we can focus on the children; rather than taking a shotgun approach and having neither set of investment pay off fruitfully.

Am I missing something in this plan? I'd be interested if people can vett this approach with opinions or facts.

Cheers

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cannon_fodder

· #2 · Jul 24, 2009

Well, how about this option? Maximize your RRSP contributions (I suppose you have some catching up to do) and take some of the refunds to invest into an RESP. Sometimes the path that might be the best financially doesn't always allow you to sleep well at night.

If and when you do go for an RESP I would employ a self-directed approach rather than one of the plans where you are lumped in with a lot of other families. There is a lot of information about that on the internet.

One other thing to keep in mind is that, depending on your income and your marginal tax rate, you may find that catching up on your contributions will have diminishing returns if it is sufficient to bring you and your spouse below higher tax brackets.

You also have a lot more time to fund your retirement than your children's education.

Finally, your TFSA can also be used to help supplement assistance your children's higher education costs.

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stephenheath

· #3 · Jul 24, 2009

One thing that may help is that you can take some time to decide. First of all, you can't even open an RESP until the child is born

Secondly, as I understand it, the main reason to put funds into an RESP is the government match, and that's only up to a certain maximum per year, and a certain maximum total. I remember reading an article or comment on Canadian Capitalist's site that if I remember correctly says you can just wait until the child is 7 or 8 and still get the maximum grants by the time they are 18. I'm not 100% on the actual numbers, but that was the gist of it.

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eddieparker

Discussion Starter · #4 · Jul 24, 2009

Great replies guys. You definitely made me remember some things I'd forgotten about.

So, slightly revised plan:

Fill up TFSA first, RRSP up until the point where we drop to just within the minimum tax bracket, and then RESP.

I'll have to read up on what you mentioned Stephen about the Canadian Capitalist blog entry. I also forgot about the matching of the RESP (what a major point to forget!). Might be worthwhile to always put a minimum of whatever the maximum match is every year.

Good points you two. I appreciate you helping me think this over.

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cannon_fodder

· #5 · Jul 24, 2009

It's not strictly matching... only 20% up to $500 a year and a lifetime maximum of $7,200 (although one would have to think that will change to at keep inflation at bay). So, if you put in $2500 in any one year, you will get an additional $500.

I apologize - I figured you already knew that or else what is the point? That is the big incentive at the beginning - the tax deferral becomes more of an issue later on but with the TFSA even that advantage is moot.

And, if your child(ren) don't go on to higher education the money is not lost forever. From a website:

If child does not pursue continuing education

If your beneficiary doesn't attend a qualifying school and you don't name another beneficiary, unused grants must be repaid to the government

If child over 21 and plan is at least 10 years old and there are no other eligible beneficiaries, you can transfer up to $50,000 into your RRSP if you have enough contribution room - this amount doubles if you and your spouse are joint subscribers to the RESP.

You would then take RESP earnings as regular income, subject to a 20% penalty tax.

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mfd

· #6 · Aug 9, 2009

The grant money has little affect on the overall return on an RESP. If you intended to contribute the life time maximum of $50k to an RESP then you should try to get that into the account as quickly as possible. If you have the money then don't schedule your contributions to try and get the grant money. Contribute as much as you can as soon as you can because compound growth has a far better impact then the grant money.

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steve41

· #7 · Aug 9, 2009

I've mentioned this before, but it bears repeating. Don't get too obsessed early in your working/married life with the fact that you haven't started to significantly save yet for retirement. I see a lot of plans, and individuals (generally) don't start saving in earnest until they have paid off their mortgage and gone through the expensive part of child rearing. The RESP is a good thing to get underway right away, but the rest of it (RRSP/TFSA/nonreg..) can and usually does, wait.

The double whammy is 'career advancement' and mortgage pmts. The fact is that most individuals salaries increase far faster than the cost of living. Once the mortgage is paid off and you are into significant job advancement, then you can concentrate on major retirement savings catchup.

Just a thought.

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sprocket1200

· #8 · Aug 22, 2009

Cannon,

I had to send the part of RESP when not used is taken as regular income and there is a 20% penalty to my advisor as they did not know this!

What a great risk. this is an astounding investment loss if the RESP is not used. say it was even $100,000. ADDING this to your income for the year will put you into the highest tax bracket. you will lose over 40% to tax, then have to pay 20% as a penalty!!

cannon_fodder said:
It's not strictly matching... only 20% up to $500 a year and a lifetime maximum of $7,200 (although one would have to think that will change to at keep inflation at bay). So, if you put in $2500 in any one year, you will get an additional $500.

I apologize - I figured you already knew that or else what is the point? That is the big incentive at the beginning - the tax deferral becomes more of an issue later on but with the TFSA even that advantage is moot.

And, if your child(ren) don't go on to higher education the money is not lost forever. From a website:

If child does not pursue continuing education

If your beneficiary doesn't attend a qualifying school and you don't name another beneficiary, unused grants must be repaid to the government

If child over 21 and plan is at least 10 years old and there are no other eligible beneficiaries, you can transfer up to $50,000 into your RRSP if you have enough contribution room - this amount doubles if you and your spouse are joint subscribers to the RESP.

You would then take RESP earnings as regular income, subject to a 20% penalty tax.

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