RESP, RRSP or TFSA
Last month I wrote about investing and the thrill experienced from receiving money that you did not work for. This article is even better. How you can get money from the Government or at least keep some of your money from going to the Government.
Registered Education Savings Plan (RESP) allow a contributor to set up a plan for a minor. The plan will assist funding for post-secondary education and trade apprenticeships. The contributor puts money into the registered investment account, and the Federal Government provides a grant of up to 20% of the contribution to a yearly maximum of $500 and a lifetime maximum of $7,200. The contributions and grants are invested and earn income within the plan. The grants are only available on contributions made up to the calendar year in which the beneficiary turns 17 years old. Once the beneficiary attends post-secondary education or trade apprenticeships the investment funds can be drawn upon, tax-free since they were funded with after-tax dollars. The investment income and grants are taxable income when the money is taken from the registered plan. A T4A is issued by the plan trustee for each calendar year when funds are withdrawn, to the beneficiary, not the contributor. Presumably, the investment income and grants will be subject to little or no tax since the beneficiary is attending school and will likely not make significant income. The opportunity to obtain the 20% grant to help fund education of our children is a great incentive and I encourage parents and grandparents to look into setting up a plan.
Registered Retirement Savings Plans (RRSP) were originally designed to encourage us to save for our retirement. Their big advantage is that money going into RRSPs is not taxed until it is withdrawn from the registered account. If you contribute to an RRSP plan when you are in a 40% tax bracket and withdraw the money when you are in a 20% tax bracket you will save 20% on your income tax bill. Many taxpayers expect to be in lower tax bracket when they retire. For those taxpayers, contributing to an RRSP should save them income tax dollars. Another big benefit of RRSPs is the fact that the investment pool is not taxed so there are larger balances earning investment income than there would be if the funds were net of income tax. RRSPs allow you to access the funds for buying a home or continuing your education. These two plans are known as the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP). There are rules that must be followed but the flexibility in accessing retirement funds for home ownership and education has helped many people. Contributions made in the first sixty days of the new year can be deducted on your prior year income tax return. You have until March 1, 2019, to make an RRSP contribution that may be deducted on your 2018 income tax return. In the year you turn 71, December 31 of that year is the last day you can contribute to an RRSP. In the year you turn 71 you must also transfer your RRSP to a Registered Retirement Income Fund (RRIF), use the RRSP to purchase an annuity, or withdraw the RRSP funds and be taxed on them.
The RRSP contribution limit is 18% of prior year income to a maximum of $26,230 for 2018. Any unused amounts earned in a prior year are carried forward and can be used in subsequent years. Amounts withdrawn from your RRSP do not create additional contribution room. Over contributing results in a 1% per month penalty for the over contribution in excess of $2,000.
TFSA allowable contribution for 2019 is $6,000. Any unused contribution room earned in prior years is carried forward and can be used in subsequent years. Amounts withdrawn create additional contribution room for subsequent years. Over contributing to your TFSA results in a 1% per month penalty for the over contribution. CRA has assessed income taxes on TFSA where there are significant gains from trading securities within the TFSA. CRA’s position is that trading gains are business income from the business of trading, so income tax is applicable. Money going into a TFSA is after-tax money however, withdrawals from your TFSA do not get taxed. There is no income tax on the investment income you earn in a TFSA.
You should consult with your investment advisor as well as your tax advisor to determine what amounts you should allocate to your RESP, RRSP and TFSA accounts each year.