Money, money money is probably very funny in a rich man’s world – thank you, ABBA, for those words of wisdom.  But most of us don’t live anywhere near a rich man’s world.  In the words of Dolly Parton, we work 9-to-5, and are just trying to make a living.  If you’re like me, you also have some savings goals in mind, but perhaps you’re just trying to stay afloat.  So what if the day comes where you can start putting money away for the future?  What then? 

In my previous post, we looked at places where you can stash your money in relation to perhaps having it grow.  Now we’re looking at some unique Canadian options for banking that involve more long term savings.

Registered Education Savings Plans

Let’s say you are expecting your first child or have already had your brood.  In the midst of the sleep deprivation, you wonder: “how will I manage to afford their education?”

In this day and age, post-secondary education is anything but cheap.  If your child might be destined for the full four-year university degree, expect it to cost at least $40 000.  At least. 

Enter the Registered Education Savings Plan or the RESP, an incentive for you to save for your children’s post-secondary education. 

The Good:  First and foremost, any interest earned in the account is tax-free, and can be withdrawn tax-free.  In addition, there is no longer an annual limit to how much you deposit. 

Even better is the Canadian Education Savings Grant (CESG), which can give contributions of up to $2500 annually an extra 20% on your contributions.  For lower-income families, the CESG are eligible for an extra 20% on top of that 20% (Note: not 40% in total.  20% of the 20% you were given.)

Finally, if your child does not continue in post-secondary education, the money in your RESP can be transferred to your Registered Retirement Savings Plan.

The Bad: While there is no annual limit, you can only deposit a maximum of $50 000 into your RESP over 21 years.  If your child desires to do post-graduate studies, $50 000 will not be enough.

Also, if your child does not go to university or college, and you have been given some money in CESG, you must pay all of the CESG back.

If the money is transferred to the RESP, you can only transfer up to $50 000 and that is if you have the contribution room in your RESP.  If not, the rest is withdrawn as income and receives a 20% penalty and is taxed at a marginal rate. 

Registered Retirement Savings Plan

Ah the Golden Years, when you no longer are burdened by work.  But, uh, that means no more steady income.  Enter the RRSP – the government’s solution to their inability to fund the Canadian Pension Plan.  It’s an incentive for Canadians to save for retirement.

The Good: It defers income tax on the money invested and the interest earned while the money is still in the RRSP.  It also has customizable contribution plans (e.g. you can contribute monthly, annually, etc.).  Upon the death of the holder, proceeds are rolled over to the spouse.  In addition, contributions to your RRSP are tax deductible.

The Bad: upon retirement, the plan is surrendered and the full amount of the RRSPs are considered – and taxed – as income.  Unless the proceeds are rolled over to the spouse, upon death of the holder, proceeds are added to the income of the holder – and taxed as such.