RESPs, TFSAs, and RRSPs... What to do...

So as my eldest son turned 10 years of age this past week, I figured it was time we started really planning ahead in terms of his education, etc. Over the past 10 years, all 3 kids have accumulated just over $4000 in birthday money, Chinese New Years gifts, and Christmas money... finally enough to maybe buy a GIC or a bond rather than let it sit in a savings account and earn next to nil.

When the eldest was born, we had looked into perhaps opening a RESP account for him. At the time, the Government of Canada was offering a 20% grant up to annual max of $400 towards an RESP (so a $2000 contribution). All the rules and exceptions involved at the time swayed my decision to start an RESP: Back then, only 4 year university programs and a handful of technical school (NAIT, SAIT) programs qualified as post-secondary schooling that an RESP could be put towards; trade school certification courses were not included nor was community college programs. So, instead we decided to focus on paying down our mortgage and maximize our RRSP contributions.

Currently the rules have changed: now the maximum grant has increased from $400 to $500 (still 20% of annual contribution); lower income earners can receive a larger grant (up to $600 annually for incomes lower than $40, 970 and $550 on incomes less than $81,941); and more post secondary schools can be paid with an RESP including trade certification programs. Hence, a lifetime maximum of $7200 per child can be received through the Canada Education Savings Grant (CESG). Not bad. Details here...

And, with the additional Alberta Centennial Education Savings Grant added towards the RESP, suddenly opening an RESP is worthwhile. The ACESG deposits $500 into an RESP for every child born to Alberta residents in 2005 and after; additional grants of $100 is available for those children who turn 8, 11, and 14 in 2005 or later (an extra $300) with a minimum contribution by Alberta residents of $100 to their RESP. Details here.

With the introduction of the TFSA - Tax Free Savings Account in 2009, we figured this was THE way I could get the wife some sort of pension and because the rules are much more flexible in a TFSA, it provided a great way to pay for our children's education too! A maximum contribution of $5000 is allowed in a TFSA but the amount can be withdrawn without penalty or taxation and be put back in future years without losing any contribution room!!

So... what to do? RRSP, TFSA, or RESP? So here's my plan: do them all! Being mortgage and debt free has its benefits... if you are swimming in debt or have a large mortgage, maximizing any of these would seem next to impossible.. but if you prioritize in the same order and contribute what you can, it's not all that bad.

First priority is to maximize contributions to my RRSP for the tax deduction. Since the wife is a stay at home parent, there is no real need to contribute to her RRSP as she has no income or taxes to pay. If you have a corporate pension and your wife stays home, buy a spousal RRSP for her for the tax deduction.

Next priority would be to maximize both TFSAs every year. As I have a union pension, the RRSP contribution room will be minimal and enable me to do this. A TFSA for a stay at home parent is a great way to 'income split' and a glorious way to save for a spouse's retirement. Using the additional tax refund from contributing to your RRSP is the best way to come up with the funds for a TFSA.

RESPs will be the last priority for contributions... with extra effort to maximize contributions in the years the kids each turn 8, 11, and 14 in order to qualify for the ACESG. I put this as the last priority because of the rules the RESP has.. If finding the funds are low, my advice would be to contribute to the RRSP and TFSA first and only put in $100 in the RESP to qualify for the Alberta resident grant in those particular years.

So this year, all 3 kids got RESPs with maximum contributions from their own savings and a top off from my tax return from last year: $2500 in each account. Each will receive $500 from the Government of Canada. The second eldest will get an additional $100 for turning 8 years old this year and the youngest hit the jackpot with an additional ACESG of $500. So the original $7500 contribution now totals $9600: a 28% return without investing in one single instrument! Free money is always nice.

Only problem now is if I wanted to maximize all those above accounts annually, I will have to come up with $17500 for the TFSAs and RESPs and an additional $3000- $6000 for the RRSP annually. And since it's already taxed money being contributed, that works out to coming up with $47,000 of annual income specifically for our family's futures. YIKES!!