What is an efficient way to save for my children’s future?
There are many options available to families and a recommendation is to consider the tools provided by the Canada Revenue Agency (CRA) for savings: the Registered Education Savings Plan (RESP) to fund future education and the Registered Disability Savings Plan (RDSP) to fund future financial security for an individual that qualifies for the disability tax credit. These two plans work in similar fashions but have different limits and rules related to them. Some basic parameters:
- Age limit – Can contribute until the beneficiaries are 31 years of age (RESP) and 59 years of age (RDSP)
- Contribution limit – Maximum lifetime of $50,000 per beneficiary (RESP) and $200,000 per beneficiary (RDSP)
Why consider using the CRA programs when you get no tax deduction from the contribution?
The best answer is that there are many benefits to the CRA programs. One major benefit is the funds in the RESP can be invested and any earnings on these funds are not taxed until removed by the beneficiary to finance future education or in the case of RDSPs to fund future disability assistance required. The second benefit is the Canada Education Savings Grant (CESG) contributes an additional 20% to RESPs of annual contributions of $500 per year to a maximum lifetime limit of $7,200 up until the beneficiaries turn 17 years of age. The Canada Disability Savings Grant (CDSG) contributes and additional 100% to RDSPs of annual contributions of $1,000 per year to a maximum lifetime limit of $70,000.
Where can I find the funds to regularly contribute to a savings plan?
When possible, it is useful to use federally provided child and family benefit payments to contribute to a savings plan on a monthly, automatic basis. These payments are received by direct deposit monthly and a financial institution can assist you with setting up both the savings plan and the direct debit (withdrawal) from the same account. On the same date, set-up an ongoing and regular contribution schedule for families. Child and family benefits are updated annually after filing your current income tax and benefit return. Now you can work with your financial institution to incorporate any changes and how you would like these reflected in your savings plan. The amount you contribute can be changed at any time, making this a very flexible and convenient option to save. This is outside of using salary and funds that may be fully committed to paying for day-to-day living expenditures. Please note that financial institutions encourage automatically setting-up payments for direct deposit into the savings plans as well as registering to receive all government grants currently available for these contributions. They also facilitate limited investments of these funds to protect principal and to allow for additional increases in the savings balances. Using government provided benefits and government provided grants can cost effectively help start the savings to investment in your children’s future.
Author Sara Jimenez, CPA, CA, CFF, CFE
SG LLP Chartered Professional Accountants