Which savings vehicle to invest in? Should I prioritize retirement or education? These questions come back every year like clockwork as tax season approaches. As young families are often shackled by an abundance of here-and-now expenses, it’s not always obvious to plan for the future. And while we all want a comfortable retirement, post-secondary education represents one of the most expensive investments for parents.
So where does one go from here in this pay now or pay later scenario. There are ways to play it smart with your money to make every dime count so you don’t have to compromise between sending your kids off to college or having the retirement you deserve after a lifetime of hard work. Here are two investment strategies to start the year off on the right financial foot and really put your money to work to secure your family’s future.
This strategy starts with the registered education savings plan (RESP). Like we just said, post-secondary education is a huge investment for families and should not be taken lightly. So redirect a bigger portion of your savings towards the RESP to prioritize your child’s education and bear with us for a minute… we haven’t forgotten your retirement.
The RESP is by far the top pick when investing for education. Like an RRSP, savings accumulate tax-free to speed up their growth, but the RESP takes things one step further with government grants (aka free money). This means every time parents add to their child’s RESP, the government chips in too—and not pennies and dimes either! In the province of Quebec, both levels of government encourage RESP savings. Every child is entitled to 30% (regardless of family income) on the first $2,500 contributed annually, and lower income families are eligible for additional grants,* making it easy and fast to supersize your education savings.
Post-secondary education is when things become interesting and you become a financial wiz. The RESP will hold three types of funds: your contributions (the money you saved), the grants received, and the investment income accumulated of both those amounts over the years. The contributions are yours; you can withdraw these tax-free and invest in your RRSP for retirement, or even a spousal RRSP.
The rest of the RESP funds are for your child’s post-secondary education and taxable in his or her hands, but given the low income level of students, they generally pay no or little tax on these amounts. So all in all, this really is a win-win situation for the whole family.
If your priority this year is retirement savings but you don’t want to compromise your child’s education, we have another solution to cover both bases.
In this scenario, you can stick to your plan to save for retirement by investing in your RRSP. You’ll have peace of mind for your retirement, as well as several instant benefits. Contrary to a tax free savings account (TFSA), the RRSP provides an immediate tax break because you can claim your contributions as a tax deduction when you file your income tax return. This basically means the money you save in an RRSP reduces your annual income, which in turn lowers the taxes you pay.
The end game here is to get a bigger tax refund, one you can then reinvest it in your kid’s RESP—and go fetch all that grant money we talked about earlier. This strategy will allow you to save steadily for both projects without putting all your eggs in the same basket. Clever!
Regardless of what you choose or how much you save, it’s key to invest consistently every year. Whether big or small, the savings you put aside add up faster than you think. Don't hesitate to contact a financial professional, such as a financial planner, to help you make the right choices.
Talk to one of our education savings professionals to learn more about our RESPs and all their options.
* Grants available in the province of Quebec: The Canada Education Savings Grant (CESG) of 20% to 40% based on adjusted family net income. The annual limit is set at $600. The lifetime limit is set at $7,200 per beneficiary. The Quebec Education Savings Incentive (QESI) of 10% to 20% based on adjusted family net income. The annual limit is set at $300. The lifetime limit is set at $3,600 per beneficiary. The Canada Learning Bond (CLB) of up to $2,000 per beneficiary, offered for children born after December 31, 2003, from families who meet the financial criteria. Certain conditions apply. See our prospectus at Kaleido.ca.
For more statistics on the investment habits of Quebec parents, see our press release on this topic.