Savings – Suman Bhandari

RRSP or TFSA?

Suman — Sun, 27 Jun 2021 23:55:17 +0000

Both registered retirement savings plan (RRSP) and tax-free savings accounts (TFSAs) offer a significant range of benefits when it comes to saving for retirement.

TFSAs :

TFSAs are registered accounts that offers tax free gains as well as withdrawals. However, contributions to a TFSA are not tax-deductible. Some of the benefits of a TFSA are:

withdraw at any time without penalty
You can make a withdrawal at any time without affecting any government benefits.
The amounts you withdraw are not considered part of your income.
There is no age limit for contributing.
Contribution is not dependent on your income or your tax return.
If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.

RRSPs

RRSP is also a registered account purpose of accumulating retirement income. The amounts you contribute are deducted from your taxable income, which may entitle you to a tax refund. However, during withdrawals it is taxed at marginal rate.

RRSPs are especially beneficial for Canadians in a high tax bracket.
The interest generated by your investments is not taxable provided it remains within your RRSP.
You may contribute up to 18% of your eligible earnings or the maximum allowed by the government.
If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.
If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.

RRSP Withdrawals: You may withdraw money from your RRSP however it will count as income and you will be taxed on the amount at a higher tax rate plus a withholding tax. You will also permanently lose the contribution room you used to originally make your deposit. However, if you use RRSP to buy a new property under the Home Buyers’ Plan (HBP) or for school fees, taking advantage of the Lifelong Learning Plan (LLP) you will not be charged.

RRSP must be converted to a Registered Retirement Income Fund (RRIF) by Dec 31 of the year you turn 71.

RRSP or TFSA?

TFSA or RRSP both are great plans. It truly depends on your financial goals, needs and your income. Withdrawals from TFSAs are always tax-free, whether you are working or retired. Withdrawals from RRSPs are always taxable.

You can also combine the two and use your RRSP for your main retirement income, while keeping some money in a TFSA to cover any unexpected expenses without affecting your taxable income.

RRSP, TFSA or both? Need help deciding?

Message or call to find the best savings solution to meet your needs!

Saving Accounts vs. Investing? Which one should I do?

Suman — Thu, 10 Jun 2021 17:30:00 +0000

First, it is a very wise decision to either put money into a savings account or invest. Which one should you choose? The answer depends on your financial goals, whether they are short or long-term plans, retirement goals, etc.

Although the word “investment” may sound intimidating, it is not. Investments are for everybody, regardless of your financial situation.

Savings Account:

Setting aside your money and storing it for a future need is called saving. Banks offer savings accounts with fixed or tiered interest rates that are relatively low, starting from 0.005% to 1.5%. A savings account is a low-risk place to keep your money safe, but do not expect large growth.

Pros:

You do not lose your money.
Easy to set up.
Good for short-term savings.

Cons:

Since the return is low, your money won’t grow much.
Due to inflation, your real rate of return might be negative.
Do not expect large gains.
Interest on savings is subject to regular income tax.

Example: If you save $100 a month starting today with an initial deposit of $0 at an annual interest rate of 0.05%, it will be worth $1,200.32 after one year when compounded annually. In short, putting $1,200 in a savings account for a whole year will generate $0.32, subject to regular income tax. Factoring in inflation at 3.4%, your real rate of return is negative. To keep up with inflation, your savings account must give you a higher return than 3.4%.

Investing Accounts:

An investing account also involves storing your money for future needs, but instead of relying on a low interest rate, your money is invested in various assets (ETFs, Stocks, Bonds, Mutual Funds, Segregated funds, etc.) for higher growth with a higher rate of return.

Pros:

Investing products such as stocks can have much higher returns than savings accounts.
Usually best for long-term financial goals (5, 10, 15 or more years).
No taxes on some investment accounts such as a TFSA.

Cons:

Returns are not always guaranteed as they depend on the market.
All investments have a certain level of risk.

Example: If you invest $100 a month starting today in a TFSA with an initial deposit of $0 at an annual rate of return of 6%, it will be worth $1,238.68 after one year when compounded annually. In short, putting $1,200 in a TFSA for a whole year will generate $38.68, and the earnings are tax-free. Even with inflation at 3.4%, your real rate of return is 2.6%, significantly higher than a savings account.

Conclusion:

Consistent investments over several years can be an effective strategy to accumulate wealth. If you have short-term goals, such as saving for a vacation, putting money into a savings account is ideal. If you have long-term goals and a longer time horizon, such as retirement in the next 10-20 years, investing will generate more returns.

It’s up to you to decide whether saving or investing is the better choice to reach your financial goals.

Children’s Education Savings Plan

Suman — Mon, 07 Jun 2021 16:42:07 +0000

Understanding the RESP: A Guide to Maximizing Your Child’s Educational Savings

By now, you’ve probably heard this term a lot but still might not be sure what exactly Children’s Education Savings Plan is. Have you heard of RESP?

Yes – Great!

No – No worries, we will explain.

A Registered Education Savings Plan (RESP) is a Canadian government-registered account designed to help families save for a child’s post-secondary education. By offering tax-deferred growth and access to government grants, an RESP can provide significant financial support when a child goes on to college or university.

Key Benefits of an RESP

Government Incentives:

Canada Education Savings Grant (CESG): The government matches 20% of contributions up to $500 annually, with a lifetime maximum of $7,200 per child. Families with lower or middle incomes may qualify for additional CESG amounts, potentially earning extra grants each year.
Canada Learning Bond (CLB): Eligible lower-income families may receive up to $2,000 without needing to make contributions to the RESP.
British Columbia and Québec offer provincial benefits that may add money to an RESP. This is on top of any money from the CLB or CESG.

Tax-Deferred Growth: While RESP contributions are not tax-deductible, any investment income or growth inside the RESP is not taxed until it is withdrawn. Withdrawals made for educational purposes can result in lower taxes, as the funds are typically taxed in the hands of the student, who likely has a low income and minimal tax burden.

Flexible Beneficiary Options: If the original beneficiary does not pursue post-secondary education, the RESP subscriber can often transfer the account to another sibling or family member, preserving the funds and the grants in many cases.

Unused Funds: Hopefully, this won’t happen as you save for your child’s education and better future. If they don’t pursue post-secondary education or don’t need the money, there are various options to utilize or withdraw these funds. You can pass it on to a different beneficiary, such as another child, transfer the money to your RRSP or RDSP, or simply close the RESP. If you choose to move money to an RDSP or RRSP or close the RESP, you must return the government grants.

Drawbacks of an RESP

Contribution Limits: Each beneficiary has a lifetime contribution limit of $50,000. While substantial, this cap might not cover all future educational expenses for high-cost programs. However, with proper planning and investment, the funds might increase the overall balance.

Restrictions on Withdrawals: Funds intended for educational expenses must be withdrawn according to specific rules. Educational Assistance Payments (EAPs)—which include grant money and earnings—can only be accessed if the beneficiary is enrolled in a qualifying program. If a beneficiary does not attend a qualifying program, government grants are returned, and some investment growth may face taxes and penalties.

Withdrawing Funds from an RESP

RESP withdrawals are divided into two main types:

Educational Assistance Payments (EAPs): EAPs consist of the RESP’s earnings and government contributions (such as CESG and CLB). They are taxable to the beneficiary, helping minimize taxes due to the student’s low-income status. For full-time students, there is an $8,000 withdrawal cap for the first 13 weeks of studies, while part-time students have a $4,000 cap per 13-week period.

Refund of Contributions (ROC): Original contributions can be withdrawn by the subscriber at any time, as they are not taxed again. However, withdrawing them while the student is not enrolled in a post-secondary program requires government grants to be repaid.

Maximizing the Benefits of an RESP

To make the most of an RESP, consider contributing consistently to receive the maximum annual CESG, and select investments aligned with your timeline for withdrawals. Additionally, keep track of provincial grants, as some provinces offer additional RESP incentives.

Final Thoughts

RESPs are a powerful tool to prepare financially for future education costs. They combine the advantages of government incentives, tax-deferred growth, and flexible beneficiary options.

Interested in investing in an RESP for your child’s future or want to learn more? Contact us today to get started.