Investing in Your Future: RRSPs and RESPs

by Gilda Spitz

The global economy has been a roller coaster since mid-September 2008.

In these troubled times, the idea of investing money may sound pretty scary. Is it a good time to invest your money at all? Would it be better to just keep it in the bank?

The answer can be different for each person and each family, depending on your circumstances. But there are good reasons to invest, even in these days of economic uncertainty.

According to Nevin Sendel, Vice President, Business Development & Communications at Global Educational Marketing Corporation, “many financial advisors have speculated that it is now a buyer’s market. So if you have many years to retirement, it may be a good time to take on some additional risk after our recent market correction.”

The Canadian government provides several ways that you can prepare for the future, and offers tempting incentives for you to do so.

Saving for your retirement

A Registered Retirement Savings Plan (RRSP) is a plan in which you can contribute a certain amount of money each year to prepare for your retirement. An RRSP is “a crucial component of every Canadian’s retirement strategy,” says Sendel.

You use the amount of your RRSP contributions to reduce your taxes. The more you contribute, the less income tax you’ll pay in the year that you make the contribution.

For example, with a taxable income of $30,000, you might have to pay federal and provincial taxes of $7,800. But if you contribute $3,000 to an RRSP, you would pay taxes of only $7,020 now, therefore deferring taxes on the remaining $780 until a later date, usually many years in the future. In addition, the funds in an RRSP also compound tax-free, which is often an even more important benefit, adds Sendel.

Your spouse or common-law partner can also contribute to your RRSP. You may wish to set this up to allow the spouse with the higher income to take the tax deduction.

The amount you can contribute in any year depends on your RRSP deduction limit, often called your “contribution room.” You can find the amount of your contribution room on your latest Notice of Assessment, Notice of Reassessment, or T1028 form.

An RRSP can contain a variety of investments including savings deposits, treasury bills, guaranteed investment certificates (GICs), mutual funds, bonds, and equities. Your advisor will help you choose the investments that are right for you, based on your requirements and preferences.

You don’t have to pay tax on any funds in an RRSP until you withdraw money from the plan. Typically, by the time you do so, you will be in a lower tax bracket, and will therefore have to pay less tax than if you paid it today.

Saving for your child’s education

According to Statistics Canada, for a child born in 2008, a four-year post-secondary education will cost $76,751. That could rise to $122,926 if your child lives away from home. And that’s just one child – how many children are there in your family?

To help you deal with these alarming costs, you can use three government programs to save money for your child’s future.

A Registered Education Savings Plan (RESP) is a special savings account that can help you save for your child’s education. Savings can grow tax-free until your child enrolls in a college or university. The maximum amount you can contribute is $50,000 per child.

When your child is ready to attend college or university, he or she can access up to $2,500 of the contents of the RESP for each 13-week semester of study. Unlike RRSPs, contributions to an RESP are not tax deductible.

However, it is the student who is taxed, not the contributor. The student would typically pay little or no tax, due to the low income of most students. If your child chooses not to attend post-secondary school, the amount in the RESP is returned to the owner of the plan, usually when the child reaches the age of 18 years. Of course, in this case, you will be taxed on the amount at that time.

If you have an RESP, you can receive additional help through a program called the Canada Education Savings Grants (CESG). Through this program, while you contribute to your RESP, you may receive additional funds from the Canadian government, to a maximum of $7,200 total per child, depending on your family income.

In addition, if you are a low income family and you open an RESP, you can receive a grant through a Canada Learning Bond (CLB) – even if you don’t actually contribute any money to the RESP! If you qualify, you can receive a gift of as much as $2,000 per qualified student from the Canadian government. Sendel is amazed that more people don’t take advantage of this generous offer. “Sadly, fewer than 10percent of eligible Canadians have accessed this grant to date,” he says.

Finding help

For all of these programs, the first step is to make sure you have a Social Insurance Number (SIN). For the education programs, your child also needs an SIN.

You can set up your RRSP through your bank or trust company, and also through a financial advisor that you trust. You can open an RESP through an RESP provider. RESP providers include most financial institutions, such as banks and credit unions, as well as group plan dealers and financial services providers.

For both RRSPs and RESPs, providers usually charge service fees. Before you open a plan, ask the provider to explain all fees, limits, penalties, and requirements.

When should you start?

Start your investments early – tax-sheltered earnings on your savings can grow surprisingly quickly. The sooner you have money in your plan, the sooner it starts to grow. To save for your retirement, set up your RRSP and start contributing small amounts as soon as you start to earn money. To save for your children’s education, set up each RESP as soon as possible – even from the day the baby is born. And if you qualify for the Canada Learning Bond, apply for it right away.

For more information

This article provides general guidance regarding the programs sponsored by the government of Canada. But, for each program, you need further details to determine whether you qualify, and how it would work for you.

For more information, go to:

  • Canada Revenue Agency website (Click here)
  • Human Resources and Skills Development Canada website (Click here)
  • Global Educational Marketing Corporation, 1-877-460-7377 or (Click here)

CNM