If you looking for the best way to save, you should opt for government-registered savings plans like RRSP, RESP, and TFSA. They are all tax-deferred savings accounts that allow Canadians’ investments to grow tax-free, but are functionally different.
Generally, an RRSP helps Canadians to save for their life after retirement while an RESP allows Canadian parents to save for their children’s post-secondary education. A TFSA, on the other hand, helps Canadians to save funds for any purpose without getting taxed.
Differences between an RESP, RRSP, and TFSA
Now that you understand the purpose of each savings plan, let’s see how each works.
How a Registered Education Savings Plan (RESP) Works
If you’re searching for the best way to save for your child’s education, an RESP will be an option to consider. It has helped many Canadian parents to invest in their children’s higher education more efficiently. The plan comes with incredible incentives such as:
- Tax-free growth of investment during the whole savings period
- Guaranteed Canada Education Savings Grant (CESG) for all plan holders
- Canada Learning Bond (CLB) for low-income families
When you open an RESP account for your kids, they automatically qualify to receive the CESG. The government usually gives out a 20 percent CESG of the parents’ contributions up to CA$2,500 per year. Meaning, the maximum CESG you can get in a year is CA$500.
To take full advantage of the CESG, you should contribute at least CA$2,500 into your child’s RESP account. However, the maximum amount of money you can save for each child in an RESP account is CA$50,000. So, over-contributions may attract penalties.
You can save in an RESP for up to when the child turns 17. When your child enrolls in an eligible post-secondary education, you can trigger the withdrawals of funds. Some RESP providers may request for proof of admission to approve your funds’ withdrawal request.
When planning to open an RESP account, you need to look for a reputable RESP provider by checking their reviews online. For instance, the Knowledge First Financial Testimonials can help you know more about the RESP Company.
How a Registered Retirement Savings Plan (RRSP) Works
Life after retirement can be overwhelming if you don’t have enough funds to take care of your living expenses. So, if you care about your life after retirement, you should open an RRSP account and start investing early.
Canadians contribute into their RRSP accounts when they file their tax returns every year. However, one should not save more than the limit set by the Canada Revenue Agency (CRA). If you over-contribute, you may pay for penalties.
When filing your annual tax returns, you need to contribute 18 percent of your previous year’s earned income. Alternatively, you may use the monetary limit set by the CRA for the current tax year. When you invest in an RRSP, your investment will grow tax-free.
How a Tax-Free Savings Account (TFSA) Works
Unlike RESP and RRSP that serves a specific purpose, TFSA allows Canadians to save for a vast range of expenses, such as education, weddings, birthday party, and vacations.
Like any other registered savings plan, TFSA also has a contribution limit/room set by the CRA. You should find out what your contribution room so that you don’t over-contribute. Over-contributions may attract a one percent monthly penalty on the excess amount.
One good thing about TFSA is that it allows your investment to grow tax-free for as long as you want to save. Besides, it is highly flexible. You can withdraw your investment at any time without getting taxed, making it the best savings plan for emergencies.
The best savings plan depends on your financial needs. If you have children, and you want to invest in their future education, an RESP will be the best option. When saving for your retirement, an RRSP will be the most convenient plan and when saving for weddings, vacations, or birthday parties, a TFSA will be the best. You need to evaluate your financial goals and start saving early.