RRSP, TFSA, RESP, RDSP… Which Vehicle Should You Use?
February 23, 2021
We’re not talking about cars here, but savings! Like cars, every savings vehicle has very different characteristics. What you want to transport (type of investment), the road used (investment horizon), the destination (short-term projects, retirement, school, etc.), and features (tax treatment, special characteristics, etc.) are all factors that influence your choice of vehicle. More precisely, it’s the combination of these characteristics and needs that guides the decision-making.
How Are the RESP, RDSP, RRSP and TFSA Different?
The RESP (Registered Education Savings Plan) is a way to save for a child’s post-secondary education. Contributions aren’t tax deductible but are supplemented by government grants. Earnings and grants are taxed in the beneficiary’s hands when withdrawn, while the amounts corresponding to the contributions aren’t taxable and can be refunded to the subscriber.
- An RESP can have more than one beneficiary1. In addition, subscribers can be the child’s family members or friends.
- The Canadian Government pays a grant matching 20% of the contributions made into the RESP, up to a maximum of $500 per year and a lifetime limit of $7,200. The Quebec Government pays a grant matching a maximum of 10% of yearly contributions amounting to $2,500, up to a maximum lifetime amount of $3,600 per beneficiary. Lower-income families can benefit from extra grant amounts that can match up to 60% of the sums invested.
The RRSP (Registered Retirement Savings Plan) is a way to save for retirement while lowering your income tax during the contribution period. Funds are taxable only when withdrawn.
- You can open a spousal RRSP to contribute for your spouse’s retirement. It’s the subscriber’s contribution room that is used, not the beneficiary’s.
- Contributing to an RRSP allows you to participate in the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).
The TFSA (Tax-Free Savings Account) is a way to save tax-free. Contributions aren’t tax deductible, but withdrawals and investment income aren’t taxable.
- Contributions made into a TFSA are limited to your contribution room, which accumulates every year. For 2021, the contribution limit is set at $6,000.
- In 2021, a person born after 1991 who never contributed to a TFSA could invest $75,500.
The RDSP (Registered Disability Savings Plan) is a way to ensure the long-term financial security of a person with disabilities. Contributions aren’t tax deductible but are eligible to receive government assistance. Investment income and grants are taxable in the beneficiary’s hands when withdrawn, while the amounts corresponding to the contributions aren’t taxable.
- To open an RDSP, the beneficiary must be eligible for the disability tax credit (DTC) and under 60 years of age.
- The Government of Canada pays a grant which can amount to $3,500 per year (maximum lifetime amount of $70,000). If the beneficiary has a lower family income, an annual grant of up to $1,000 is offered, for a maximum lifetime amount of $20,000 per beneficiary.
In all cases, keep in mind your situation is unique! So, it’s essential you see the right financial advisor before making any decision regarding your savings.
To quickly differentiate the various savings vehicles and their differences, download our fact sheet. Stick it on your fridge!
1.Family plan; not offered by Kaleido.