Registered Education Savings Plan (RESP)

Last week we discussed who could benefit from, and the pro’s and con’s of, opening a Tax Free Savings Account (TFSA)  and the week before we discussed Registered Retirement Savings Plan  (RRSP)

So it seems fitting that this week will be looking at the in’s and out’s of a  Registered Education Savings Plan (RESP)

What is a Registered Education Savings Plan (RESP)?

An RESP is a savings account that you can set up on behalf of a child. Funds can be added to the account as often as you like however they cannot be withdrawn without penalties until the child is 18 or ready to attend a post-secondary institution. The account can remain open for a total of 36 years and when the time comes for the beneficiary to attend a post-secondary institution they are able to withdraw the funds over a period of 4 years.

When funds are withdrawn they are added to the students annual income (which quite often is low) and is taxed at the applicable rate.

Throughout the lifetime of the account the contributor remains in control and is responsible for requesting the release of the funds. If the beneficiary does not attend a post-secondary institution then the account is passed back to the contributor who can either close the account, transfer the account to a new beneficiary or transfer the funds to their RRSP.

Pro’s and Con’s

Pro- You can open an RESP and begin making contributions from the moment your child is born. This is the best time to start because even if you are only able to make small monthly contributions, those contributions have 18 years to grow. When it comes to investing, the longer the time frame the better.

The list of accredited post-secondary institutions is long and varied ranging from university & colleges to trade schools and the money can be used to cover any study related expenses.

Additionally the government will match all contributions dollar for dollar up to $2500/year. Contributors who fall into the lower income bracket are also eligible to receive a one off payment of up to $2000 of additional government funds through their Canadian Learning Bond initiative.

Cons- If the beneficiary doesn’t end up attending a  post-secondary institution, or if they do not complete their education and the creator of the account decides to close it down they will have ALL OF THE INTEREST/GAINS that have been earned over the lifetime of the account added to their annual income and will be taxed accordingly. This transfer of ownership will occur after the account has been open for 36 years.

Additionally if you close the account you must pay back any government grants and if the account has been open for less than 10 years at the time of the closure you will lose all of your gains.

Who is a good candidate for an RESP?

Who should invest: EVERYONE who has a child.

If you are in a lower income bracket and wonder which is more beneficial: contributing to RRSP’s or RESP’s, we would recommend a regular RESP contribution.  With an RESP you receive government contributions of up to $2500 per year. The government is never quick to give away money so you might as well make the most of their offers while you can!!

Who is not necessarily a good candidate for an RESP?

Well this may seem like a pretty obvious statement but  if you don’t have a child then this isn’t the account for you!

Personal tip from Teya

Until your child is around 10 years old, you can afford to be risky with the type of investments you choose for your RESP. My son and nephew who are only 2 years old each have close to 2 years worth of university tuition in their RESP accounts. This is a result of some truly incredible gains on speculative stocks (there were big losses too, but the accounts are up almost 300%!)

Some people call me foolish for investing in high risk stocks, but with the right broker, the right time frame and the right state of mind, you can make incredible gains.

That said you need to do your research before investing in any specific RESP group funded plan.  There are many plans with strict conditions and failure to read this fine print can result in you losing your investment.

We recommend going to an INDEPENDENT investment adviser who will have your best interests in mind rather than someone who works for a bank or specific fund, as their focus is to sell you a product.

 If you need advice on RESP’s or anything tax related please contact us.

Tax Free Savings Account- TFSA

Last week we discussed who could benefit from, and the pro’s and con’s of, opening a Registered Retirement Savings Plan  (RRSP)

This week will be looking at a Tax Free Savings Account (TFSA) in more detail.

A TFSA is probably the most misunderstood type of savings account due to the amount of misleading information that is provided by various “professionals” so we hope this post will help you gain a much stronger understanding.

Tax Free Savings Account (TFSA)

What is an TFSA?

As the name suggests a TFSA is an account that allows you to earn TAX-FREE gains on your savings. As a Canadian, you can invest up to $5000/year (of taxed earnings) into a TFSA, withdraw money at any time TAX-FREE and you can also re-contribute any funds that you have withdrawn over the course of a year in the following calendar year.

In our opinion, it is the best investment tool available to Canadians and many investment advisers and accountants agree, preferring TFSA’s to RRSP’s.

The best way to utilize your TFSA is to invest in the highest risk investment that you can tolerate. Your level of risk should be determined by the amount of time you have to invest. Before you make any leaps into high-risk investments we advise that you consult a professional.

Pro’s and Con’s

Pro- You have the opportunity to make significant gains. For example: One broker we spoke to has reported that the largest TFSA at his firm, that is worth over $2,000,000, was generated over four years ($20,000). That is an earning of $1,880,000 TAX-FREE.

Now, this type of gain is by no means standard but it does demonstrate the type of potential that investing in the right type of TFSA can have.

Con- Not every TFSA is designed to give you a good return and you need to talk to an independent investment advisor if you want to find the best product (Contact us for a referral to a quality advisor). This can prove costly however, it is worth the investment as there are a lot of TFSA accounts, set up through banks, that only give you pennies each month due to the conservative nature of the investment.

While you are earning the same amount on your investment as a person who keeps their money under a mattress and considers the change they find in their couch interest. The bank is investing your hard earned money to grow their profits.

Who is a good candidate for a TFSA?

EVERYONE. They really benefit all Canadians with money to save.

Who is not necessarily a good candidate for a TFSA?

The only reason you shouldn’t have one is if you don’t have any savings to invest.

If you need advice on TFSA or anything tax-related please contact us.

Stay tuned for next weeks post, which will discuss Registered Education Savings Plans (RESP’s)

Spotlight on Emma- Homeroom’s Quickbooks Queen

Emma 2Emma “the most tattooed bookkeeper in Vancouver” hails from London, England and has been a member of the Homeroom team since 2010. Before finding her true love (Quickbooks) Emma had an extremely varied job history- Wedding Planner, Dreadlock Expert, Apprentice Electrician & Finder of Employment for those with barriers in the DTES.
We felt it was time our clients got to know a little more about Emma.

How would you describe yourself?

Captain Brunhilda- Mighty Warrioress who SLAYS GST returns!!!  Or something like that?  I am cheeky little red-haired princess.  I am a giant nerd.  Yesterday my partner asked me to explain excel and I got OVERLY excited- I raved about all it’s wondrous functions for at least 15 minutes…. I am a nerd.  A BIG nerd.  A nerdy nerdy nerd.

What is your favorite thing about working at Homeroom?

My sisters-from-other-misters also known as the delightful ladies I am blessed to work with.

What are your ultimate personal goals?

  •  Marry Bruce Willis
  • Live in a big pink castle
  •  Get a pink winged unicorn (or a pegasus/unicorn?  A pegicorn? a unisus?).
AND most importantly to be happy and for my son to grow up happy and well-adjusted.

Why do you love bookkeeping so much?

I love how there is no grey area with numbers, they either add up or they don’t!! I also really like stamping all the receipts with the ‘Posted’ stamp because it makes me feel important.

What is the funniest item you have had a client attempt to write off?

Once I had a client try to write off hair replacement therapy.

Describe your ultimate bookkeeping client?

Friendly, challenging and organized.   They should also bring me presents.  Especially cupcakes or chocolate.

You can connect with Emma on LinkedIn or find our more about her through her Homeroom Bio.

Registered Retirement Savings Plan- RRSP

RRSP

With tax season right around the corner it is important that you have a good understanding of the different types of accounts that may be offered to you with promises of saving you money on your taxes.

 

The most commonly mentioned accounts (and the ones we will be discussing in detail) are RRSP’s, RESP’s and TFSA’s and depending on your situation these accounts can have a variety of tax implications or savings.

 

Due to the fact that the person selling you the account does not know your personal tax situation they often do not take these implications into consideration and only note possible savings. We recommend you ask a third party tax specialist to advise you on your investments before you commit.

 

Over the course of this month we will provide you with an explanation of the different types of accounts, the pro’s and con’s of each account and an overview of who will benefit from each one.

Registered Retirement Savings Plan (RRSP)

What is an RRSP?

An RRSP is a tax sheltered account that has been created by the government as an incentive to encourage people to start saving money for their retirement. The money invested in the account and any interest earned is not taxed until the funds are withdrawn when you retire.

The belief is that when you are of retirement age your taxable income will be less than it is now. Therefore you will be in a lower tax bracket when you withdraw the money which will provide tax savings. Additionally because your contributions reduce your income each year you should be paying less tax each year.

In addition to this any annual contributions you make prior to the RRSP deadline reduce your taxable income (the RRSP deadline for 2013’s tax year is February 1st 2014).

Pro’s and Con’s

Pro- You can use your RRSP account to purchase your first home, or go back to school without being taxed on the money. But you need to eventually re-contribute it back into RRSP’s. Essentially, you are borrowing money from yourself that you must repay.

Con- If you withdraw money from your RRSP before retirement (with the exception of the reasons listed under pro’s) the amount you withdraw will be added to your yearly earnings which may place you in a higher tax bracket

Who is a good candidate for an RRSP?

Individuals who are employed.

Depending on your annual income your RRSP contributions can move you  into a lower tax bracket. This will provide you a with an income tax refund. The best thing to do with your refund (although it’s not very exciting…) is to buy more RRSP’s.

Who is not necessarily a good candidate for an RRSP?

Quite simply self employed individuals.

Although RRSP’s reduce your taxable income dollar for dollar. However, they DO NOT REDUCE YOUR TAX LIABILITY DOLLAR FOR DOLLAR.

Self employed individuals will always have a balance owing at the end of the year (which is a good thing because it means that your business is going well, if you don’t have a balance owing then you should probably reevaluate your business plan). This means that before you put your savings into an RRSP you need to make sure that you have enough money in your account to contribute AND pay off the tax man at the end of the year.

If you are self employed we recommend that you do not talk to your banker/investment advisor about RRSP’s until you have met with a tax specialist. A tax specialist will offer you a non-biased opinion based on your situation because they aren’t trying to sell you anything.

If you need advice on RRSP’s or anything tax related please contact us.

Stay tuned for next weeks post, which will discuss Registered Education Savings Plans (RESP’s)