By Allan Norman | RESPs | MoneySense
- Open a TFSA and invest in index funds
- Open an RRSP and invest in index funds
- Open an RESP for our three kids
A: Welcome to Canada, Olasumbo, Bonjour! All three are good long-term wealth building alternatives so you won’t make a mistake choosing either one, assuming you’re able to qualify for each. You may have some shorter term goals or needs which may lead you to pick one strategy over another. For example, you’re new to Canada…
Do you really have a good handle on your expenses?
The TFSA is probably the best cautionary approach. If you find expenses are more than expected you can withdraw from your TFSA tax-free. After a year or two, with your expenses confirmed, you can withdraw from the TFSA and contribute to your RRSP, RESP, or mortgage, depending on your situation at the time.
Do you have RRSP contribution room?
Probably not. Contribution room is based on previous year’s income as a permanent resident. If you don’t have the room you’ll have to wait a year, so again the TFSA is the best short-term strategy.
When you can contribute to an RRSP, make sure you gross up the $10,000 even if you move it from your TFSA. If your marginal tax rate is 30% then $10,000 x (1-30%) = $14,285 should be your total RRSP contribution. If you’re not going to gross up your RRSP contribution you’re likely better off sticking with the TFSA.
Of course, one advantage of the RRSP over the TFSA is the First Time Home Buyers Program. With the RRSP you have almost an extra $5,000 you can use a part of a down payment for a home. A second advantage of the RRSP is to maximize the Canadian Child Benefit. An RRSP contribution will reduce your net family income and increase your CCB.
Now, what about the RESP? If your children are going to pursue a post-secondary education and remain in Canada it’s a good option. The most you would want to contribute for your three children now is $7,500 because there is no past grant to catch up on. Beneficiaries must be permanent residents to earn a grant. You’re probably going to help pay for their education one way or another, so why not contribute to a Family Plan RESP and get the 20% grant? Maybe because there is only so much money to go around?
What is most important to you Olasumbo? Retirement? Start with the TFSA, then once your RRSP contribution room is built up, move everything to an RRSP. Your children’s education? Contribute enough to the RESP to get the grant each year.
They’re all good strategies and they’ll all contribute to your overall wealth, just in different ways.
