Financial planning is priceless when it comes to safeguarding both your and your family’s future well-being. Financial investment planning in Canada comes down to two crucial forms of investments – RRSP and RESP.
The obvious and much quicker decision would be to take both. However, it is very expensive for most people in Canada to do so. So, here lies the problem of choice!
Deciding between securing retirement and securing your child’s post-secondary education is indeed difficult. However, in-depth knowledge in this matter might make the decision-making process much, much easier!
Click on this link to seek expert advice and bid farewell to any confusion you may have regarding these investments.
Registered Retirement Savings Plan (RRSP)
The registered retirement savings plan primarily helps people in Canada save up for retirement. This is how it works – an account is opened where funds are deposited every year. This fund gets automatically compounded, and the returns are not taxable.
Note that there are other benefits of RRSP as well. For example, it saves taxes on the income of a certain individual every year if they deposit a certain amount in the RRSP account. You can then withdraw the total compounded amount from the account after retirement.
The RRSP acts more like an investment account rather than a savings one in Canada. This is because amounts invested in the account are non-taxable, and tax is only deducted when the entire amount is withdrawn during retirement.
RRSP accounts may also hold assets other than cold hard cash like mutual funds, stocks, bonds, ETFs, and GICs. It also minimizes almost every income tax burden you may encounter in your working life, thanks to the tax-deferred nature of the plan. Also, investing in this account leads to a discount on the yearly taxes that need to be paid.
Limit of Contribution
The government has put a cap on the maximum amount that parents can contribute to an RRSP account. It can be the lesser of the two:
- 18% of your previous year’s income, or
- A maximum amount of $ 27,830 (for 2021)
Note that the maximum contribution keeps changing every year–make sure you check the current limit before contributing.
Registered Education Savings Plan (RESP)
The registered education savings plan is an account for you to deposit funds to save up for your child’s post-secondary education. Just like the RRSP, the funds deposited in this account are also not taxable.
Once your child has enrolled for college, university, apprenticeship programs, or a combination of one or more of these, you can withdraw the money from the account. Note that this amount will be treated as an income to the beneficiary vis a vis your child.
Also, the fund can be used for any educational purpose. Just like RRSP, RESP also makes investments in various assets other than cash. These include bonds, stocks, mutual funds, and many more.
All in all, RESP can be just the head start your child needs to soar high in their career. Paying for your kid’s post-secondary education reduces the burden from their head of acquiring money for their education and gives them enough time and peace of mind to concentrate on their academics.
Limit of Contribution
An individual can make a maximum lifetime contribution of $50,000. In addition to a limit to the amount, there’s also a time limit–the plan can be in operation for a maximum of 31 years.
Did you know that the government plays a substantial supporting role in this plan? They, too, contribute to the account.
Government grants of $500 per year are given by the Canada Education and Savings Grant (CESG). But remember that this is restricted to 20% of your annual contribution. However, if you do not contribute enough to qualify for this $500, the limit can be carried forward to the following year.
The maximum contribution that the government can make in the form of grants is $7200 over the entire lifetime of that particular student. Other grants that are added to the RESP are the British Columbia Training & Education Savings Grant (BCTESG), Canada Learning Bond (CLB), and Quebec Education Savings Incentive (QESI).
RRSP vs. RESP
In addition to a financial constraint that you may have, a few other scenarios warrant choosing between the two. For example, a child can support their post-secondary education by taking up student loans.
Such loans are easier to get as compared to loans taken after retirement. However, as a Canadian, you must already know how tough it is to approve your loans after retirement.
Canadian law states that up to $ 50,000 contributed into RESP can be transferred to RRSP without withdrawal. Moreover, this transfer will not be taxable.
Therefore, contributing to RESP is indirectly contributing to retirement provided that there will be no further higher studies or the amount is enough to fund the education.
Investments: RRSP vs. RESP
RRSP is a long-term investment opportunity. Stocks and mutual funds are perfect for investing for an extended period. In the case of shorter investments, equities are great because they provide a greater return, but they come with high risk and volatility. On the other hand, bonds and GICs are safe-haven investments with a fixed and low return.
Investments in RESP will depend a lot on the child. A young child would mean a longer time in hand to invest. This can be an excellent opportunity to invest in high-risk and high-return stocks and equities. Moreover, aggressive investments have huge benefits.
When your child grows up, and his secondary schooling is almost at its end, the portfolio is shifted from high-risk equities to low-risk and steady return bonds and stocks.
Endnote
The Government of Canada provides two beneficial financial planning schemes, each catering to a specific purpose. Both the financial plans have situations where one can be preferred over the other.
RESP might have the edge over RRSP since investments in the former can be transferred over to RRSP if they are not withdrawn. All in all, we advise you to choose carefully and in line with your needs!
