Investments (Spending Category Part 11)

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Overview
“Investments” is part 11 of my writing series. To see full complete spending categories, read my February 2016 newsletter at www.PrudentMoneyCoach.com.

According to Crown Financial Ministries Canada’s Percentage Guide, what falls under Investments category is long-term investment planning, such as college education or retirement. For this newsletter, I will write about three tax-sheltered plans in Canada; they are retirement, college, and disability plans. Before I continue, I do want to say that you should take care of your non-secured debt first before investing. (Mortgage is a secured debt.) This means that if you have credit card debts or student loans, you need to pay them off first before putting the money into your future. It makes no sense to pay 20% interest on your debt and earning 5% on your investment.


RRSP (Registered Retirement Savings Plan)
Many people have heard about RRSP, but only some utilize it. A common reason I have heard is that they do not have the extra money; they barely survive (cash flow problem). If you are contributing to your company’s pension plan, I think it is ok if you have little or no RRSP. You have set aside some funds for retirement. However, I have also heard reasoning from a few people who argue against RRSP. Here is what they say.

• I don’t believe in RRSP. If I have extra money, I would pay down my mortgage first. Government will take care of me during retirement.
• If I save in RRSP, I will be “punished” later in my retirement because I would be making too much money and I would be subject to clawback for social assistance (meaning he/she would have to pay back social benefits (money) he/she receives from the government because his/her income is too high).

I think the main purpose of government creating RRSP program is to encourage people to save for their retirement by deferring tax payment on that retirement money and let it grow tax free in the meantime. Yes, government provides other benefits such as OAS (Old Age Securities) and CPP (Canada Pension Plan) when you reach certain age, but these are meant to be supplement, not your primary sources of income. Firstly, there are requirements that you must meet before you qualify. Secondly, the amount is not much. And by the way, if you have never contributed to CPP, you would not be getting it in retirement either.

Now about the clawback, it would be a problem if you have a lot of investment (say more than $1 million) and multiple sources of income in retirement. For 2016 tax return, if you make more than $73, 756, then you would be subject to clawback. Depending on your income (how much higher than $73,756), you may have to pay back a portion of OAS or all of it.

Going back to the main purpose of RRSP (which is to save for retirement), it is assumed that your income would be lower during retirement than when you were working. If you continue to work during retirement, or if the sum of all your income sources will be high, then it does not make sense to put money into RRSP.

It makes sense to put money into RRSP when your income is high (deferring paying high tax on that money), and withdraw the RRSP money when your income is low (paying lower tax on that same money). It is not a tax-avoidance plan, but a tax-deferment plan, meaning you delay paying tax on that money.

If you are already in a low tax bracket, then TFSA (Tax-Free Savings Account) may be better for you. Speak to your banking advisor/ financial advisor.

Whatever form of money saving you choose, I think you should still save for retirement. It could be in the form of RRSP, company pension plan, a rental property, or others. It would be unwise to not plan for the future.


RESP (Registered Education Savings Plan)
If you have children, nieces, nephews, grandchildren, or care about any child’s future education, you should consider getting an RESP for that child. This is one of government’s program that you should not miss. You automatically get 20% grant from the government for each dollar you put in, up to $2,500/year (maximum grant of $500 annually). If you are in lower income household, you may qualify for additional benefit. And if you live in British Columbia, the provincial government has extra grant for you, called British Columbia Training and Education Savings Grant (BC TESP). Why would you not want to get the free money? Which investment program gives you at least 20% return guaranteed every year?

Anyone can open an RESP account for a child. If that child does not need the money for his/her post-secondary education (say he/she receives scholarship or decides not to go to school after high-school graduation), then

• your contribution would be returned to you,
• the government grant portion will be returned to the government, and
• the income that has been growing tax-free all these years can be withdrawn with additional tax paid. Alternatively, if you still have RRSP contribution room, you could transfer that income and avoid paying additional tax on it.

Personally, I think contributing to an RESP as a birthday gift (or Christmas gift or whatever the occasion is) is better than toys or stuff. 😊

There is more to the RESP program than what I can write (for example, how much can you contribute, can you catch up your contribution and still receive grant, etc.). You should do more research or talk to your financial advisor/ banking advisor to learn more about it.


RDSP (Registered Disability Savings Plan)
This program is not talked about as much as the other two (RRSP and RESP). Like its cousins, RDSP is also a tax-deferment plan and you may be eligible for government grant. This fund is meant to help those with disabilities (who are eligible for disability tax credit) with future financial needs such as medical and living costs. There is no limit on the amount you can contribute, but there is a limit on the grant received. The grant is more generous than RESP – 300%, 200% or 100% depending on the family income and the amount of contribution. If you are in the lower income household, you may qualify for additional benefit in the form of Canada Disability Savings Bond (CDSB).

Again, please do more research or talk to your financial advisor/ banking advisor if you would like to learn more.


Conclusion
Being a good steward with your money includes planning for your future. It would be foolish to think that someone else (or government) will take care of you, because nothing is certain. Government may run out of money, scrap the program, or increase age eligibility. Of course, we do not know what will happen, but this is even more reason why we need to plan. Pay down your non-secured debt first, then save for your future. The longer you let your investment grow, the more you will earn. This means the younger you start saving, the more your money will grow. Don’t forget to take advantage of government’s sheltered plan – RRSP, RESP, and/or RDSP.
 
For more help with reducing your money-related stress, contact me at (six zero four) 728-5139 or Effie[at]PrudentMoneyCoach[dot]com. Take advantage of my free first assessment meeting to see if we are a good fit.

 
Sources:

• http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html
• https://www.canada.ca/en/employment-social-development/services/student-financial-aid/student-loan/student-grants/cesg.html
• http://www2.gov.bc.ca/gov/content/education-training/k-12/support/bc-training-and-education-savings-grant
• http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/cdsg-eng.html