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RESP or RRSP? Plan to Invest in Both

If your family includes children, you may feel that Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs) compete for  your investment dollars.  And now that your tax refund has landed in your bank account, you just can’t decide which tax-sheltered plan you should invest it in.

Why choose? With a little planning, automatic monthly contributions, and lump sum top-ups, wise parents can stretch their investment dollars to contribute to both RESPs and RRSPs using tax sheltered plans, government grants, and compounding investment returns.

Choose Your Sequence of Contributions Carefully

To maximize your overall family investment savings, choosing where you invest your money first can make all the difference. If they plan it right, an average Canadian taxpayer with both an RESP and an RRSP can stretch $1000 into $1360.

Here’s how it works: a $1000 contribution to an RESP will generate a Canada Education Savings Grant (CESG) of $200, turning your $1000 into $1200 (not even counting any investment income from the deposit). This 20 percent grant for eligible RESPS gives up to $500 per qualified beneficiary annually. Keep in mind, however, that certain conditions apply in order to obtain a CESG. Check out their website for more details.

While an automatic 20 percent ROI sounds pretty good, there may be an even better option, depending on your personal income tax bracket. For example, if you are in a 30 percent income tax bracket, and deposit that $1000 to your RRSP instead of the RESP, you’ll get a $300 tax refund, turning your $1000 into $1300.  And if you then take that $300 tax refund and deposit it to the RESP, it generates a 20 percent grant of $60. Voila. Your initial $1000 is now $1360, and you’ve contributed to both RRSP and RESP, making your money work even harder.

Use Your UCCB to Build Your RESP

Keep your RESP growing steadily with regular contributions. Consider earmarking your Universal Child Care Benefit (UCCB) of $100 per month per child under the age of six for monthly RESP contributions. This equals a $1200 annual contribution per child, and will generate another $600 in CESG grant money. And there’s even more good news –  proposed UCCB changes may mean the benefit will increase to $1,920 per child per year starting in 2015, giving parents extra funds to contribute to their children’s RESP.

Automate RRSP Contributions

Another wise move for parents is to automate RRSP contributions so you aren’t scrambling to find money for a last-minute deposit.

RRSPs are popular tax-deferred retirement savings vehicles for Canadians. For every dollar earned and contributed to an RRSP, the taxes you owe are deferred until a later date (hopefully when you’re retired and in a lower tax bracket).  So the taxes you’ve already paid through payroll deductions will be returned to you in the form of a tax refund, which can then be used to top up your child’s RESP.

Whether contributing through payroll deductions or regular bank account withdrawals on the same date as your pay is deposited, make it automatic so you don’t forget or spend the money elsewhere.

Deposit Lump Sums to RESPS Early

Make the most of your lump sum RESP deposit by investing it as soon as you get it.  Whether it’s from your tax refund, gift money, or part of your annual work bonus, investing early in the year lets your contributions start earning investment returns and CESG money sooner, allowing more time for compounding interest to help the RESP grow even more.

A sound family financial plan includes savings strategies that work together to maximize your chances of successfully meeting your goals, such as retirement and post-secondary education.  If you’re unsure of future education costs, an RESP calculator may help. And with the many options now available to Canadian investors, contributing to both RRSPs and RESPs makes sense for today’s families.