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We regularly hear about RRSPs, TFSAs and RESPs. No, it’s not a series of Scrabble letters; these are three very different savings mechanisms.
How can you make sense of this all? How can you choose what’s right for you? To answer these questions, let’s see what’s behind these letters and look at the main characteristics of each.
RRSP
The most popular, the Registered Retirement Savings Plan (RRSP) is a mechanism put in place by the tax authorities to promote retirement savings. The contributions permitted in this plan are limited by precise tax parameters based on earnings and contributions made to other retirement plans. The RRSP’s primary characteristics are:
- Contributions are deductible from income;
- Income generated in an RRSP is not taxable;
- Amounts withdrawn from an RRSP will be taxed.
TFSA
More recent than the RRSP, the Tax-Free Savings Account (TFSA) has its own set of rules. Contributions are limited to a yearly cumulative ceiling, which is currently $5,500. If you have unused contribution room from previous years (since 2009), it will automatically be carried forward. As such, if you contribute to a TFSA for the first time in 2018, you can contribute up to $57,500 in the plan. The TFSA’s other characteristics are:
- Non-deductible contributions;
- Income generated in a TFSA is not taxable;
- Amounts withdrawn from a TFSA are not taxed.
RESP
Last but not least, the Registered Education Savings Plan (RESP) allows individuals to make contributions to a plan for with the purpose of funding a child’s post-secondary studies. Annual contributions are not limited, but the cumulative ceiling is $50,000. The RESP’s other characteristics include:
- Non-deductible contributions;
- Income generated in an RESP is not taxed;
- Contributions can be reimbursed to the payer with no tax impact;
- Earnings, paid in the form of an education assistance payment, are taxable for the plan’s beneficiary (i.e. the child studying).
Contrary to an RRSP and a TFSA, an RESP gives entitlement to government incentives. In fact, the federal and provincial governments provide a subsidy for each child beneficiary of an RESP, from birth until the year they turn 17. The maximum annual financial aid is $750 per beneficiary, that is, 30% of the first $2,500 in contributions paid yearly. Low- and medium-income families can obtain additional assistance. Each child is entitled to a maximum cumulative of $7,200 for federal purposes and $3,600 for Quebec.
Advice
To get the maximum savings possible, use each of these financial mechanisms wisely based on your saving ability. Since they have their own advantages, you need to examine their objectives properly in order to prioritize the best plan for you.
Don’t hesitate to contact your tax specialist or financial advisor to make the best investment decisions possible.