SprottWealth Insights

RRSPs, TFSAs and RESPs

As Canadian as NHL or CBC: 
RRSPs, TFSAs and RESPs

As acronyms, they are as much a part of the Canadian lexicon as NHL, CBC or the CRA. Yet each year Canadian investors wrestle with the concept of Registered Retirement Savings Plans, Tax-Free Savings Accounts, and Registered Education Savings Plans and how best to utilize each.

Often forgotten is that while RRSPs, TFSAs and RESPs each offer some very positive tax-savings benefits, they are still primarily about one thing: putting money aside for future use. Whether for retirement, for a large purchase, or for a child’s education, the premise behind all of them is to provide you with a tax incentive to do some future financial planning. It bears keeping in mind, however, that each has its own set of rules and attributes that make choosing the right savings account, or combination of savings accounts, extremely important.

While the deadline for 2014 RRSP contributions isn’t until March 2, 2015, planning ahead can allow you to take full advantage of many of the benefits the government makes available to you through these programs.

 

RRSPs versus TFSAs

A common question among investors is whether it makes more sense to put capital into an RRSP or a TFSA. Most financial planning experts will tell you both, if you can afford it, but if that isn’t feasible, knowing the differences between them is key.

Both offer tax advantages, but choosing which one is best for you depends on your own individual financial and tax situation. An RRSP is intended for retirement savings, while a TFSA is meant for any kind of savings goal, including tax-free withdrawals at any age.

 

Other comparisons

  • RRSP contributions are tax deductible. TFSA contributions are not.
  • With an RRSP, you deduct your contribution from the income you report on your tax return. With a TFSA, you can't deduct your contribution on your tax return.
  • You pay tax on your RRSP withdrawals because you made the contributions with pre-tax dollars. TFSA withdrawals are tax-free because you made the contributions with after-tax dollars.
  • In the year you turn 71, you can't make any more contributions to your RRSP and you must close it. At that time, you have to use your savings to buy either an RRIF or an annuity. With a TFSA, you don't have to stop contributing or close it at a certain age.
  • You need earned income to contribute to an RRSP but not to a TFSA.

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With both plans, you can name your spouse as a beneficiary. The money will roll over to them upon your death. But with an RRSP, after your spouse dies, taxes will be due on any money left in the account. For children or others inheriting the money, they will receive what is left after the tax is paid. With a TFSA, only the increase in the value of the TFSA since the date of death is taxed in the year the individual or estate inheriting it receives it. If the amount received is not greater than the value of the TFSA at death, no tax is paid.

One other key difference with a TSFA: withdrawn amounts can be re-contributed starting the calendar year following the withdrawal, or any year thereafter. Unused room carries forward forever, so if you have not yet started to save in a TFSA you can contribute as much as $36,500 in 2015 to grow tax free.

* Source: Investor Education Fund.

 

RESPs

Another way to put money aside in a tax efficient fashion is through an RESP, or Registered Education Savings Plan. An RESP is a dedicated savings plan to help you save for a child’s education after high school.

One of the more interesting aspects of an RESP is that the federal government will provide a grant (CESG or Canadian Education Savings Grant) equal to 20% of what you contribute to your plan on the first $2,500 of your annual contribution (up to a lifetime maximum of $7,200 per child). For example, if you contributed $2,500 to one child’s account in 2014, the government would further add 20%, or $500, to that RESP account.

While the government limits its annual contribution to $500 per beneficiary, if you missed a previous year’s contribution, you can carry forward the grant availability to future years. In such a case, the government will provide a grant equal to 20% of what you contribute to your plan on the first $5,000 of your annual contribution (providing $1,000 in annual grant contributions) until the carry forward amount is used, or until the year in which the beneficiary attains age 17. The grant carry forward amount can be calculated for every year you didn’t contribute to your RESP all the way back to the year of your child’s birth.

Other benefits to RESPs:

  • Your savings grow tax-free. There is no tax on the investment earnings, as long as they stay in the plan. Once withdrawn from the plan, any earnings are taxed in the hands of the beneficiary, at their tax rate.
  • If you save for a child age 17 and under, the federal government also puts money into the RESP as a grant or bond. In some provinces, the provincial government may also contribute.
  • You can typically put money in whenever you want, up to a lifetime maximum of $50,000 per child, though some plans require set monthly or annual contributions.
  • The contributions are not tax deductible, but you can withdraw them tax free from the plan at any time.
  • Your child can take money out of the RESP when they enrol in university or college or another qualifying education program.
  • An RESP can stay open for up to 36 years. Under specified plan rules, the plan can stay open for up to 40 years for beneficiaries eligible for the disability tax credit.

* Source: Investor Education Fund.

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Interested in learning more about RESPs, RRSPs, and TFSAs? We would be happy to explore the best options for you.

Important Dates

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