Registered Savings

FORUM Magazine


Helping clients prioritize

With summer just around the corner, now may be the ideal time to sit down and take a careful look through your client files to ensure you have helped them prioritize their registered savings.

In a perfect world, you would encourage your client to maximize contributions to all registered plans; however, this is simply not feasible for most Canadians, who instead need to prioritize in order to take maximum advantage of all registered plans.

Take the case of Joanne, who earns $80,000 annually. She is married to Kyle, who currently has no income. They have three young kids, the youngest of whom has a disability that qualifies him for the disability tax credit.

The couple has the opportunity to save money in a registered education savings plan (RESP) for all of their kids, contribute to a registered disability savings plan (RDSP) for their youngest, and save the balance for retirement through an RRSP or TFSA.

How should Joanne and Kyle allocate their registered savings? To start, I’ve always been a fan of “free money.” After all, if the government is willing to give you money to help you save, why not take full advantage? So, my advice would be to begin by contributing to an RDSP for their disabled child. The RDSP allows you to invest up to $200,000 in a tax-deferred manner. Perhaps the most attractive aspect of the RDSP, however, is the ability to supplement the plan with matching Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs).

CDSGs and CDSBs are based on family income. If the beneficiary is under 19, as is the case with this couple’s son, it is his parents’ family income that matters. CDSGs are equal to 300 per cent of the first $500 of annual contributions and 200 per cent on the next $1,000, for a maximum annual entitlement of $3,500, subject to a lifetime maximum of $70,000. If family income is more than $83,088, the CDSG is 100 per cent on the first $1,000 of annual contributions.

CDSBs of up to $1,000 annually, up to a lifetime maximum of $20,000, can also be paid into RDSPs for lower-income families. No contributions are required.

2011 marks the first time that retroactive CDSGs and CDSBs can be collected based on new contributions. As a result of the change, when an RDSP is opened, CDSGs and CDSBs will ultimately be paid on unused entitlements for the preceding 10 years (but no earlier than 2008) up to an annual maximum of $10,500 and $10,000, respectively.

Let’s assume Joanne and Kyle have not yet opened up an RDSP for their son. For each of 2008, 2009, 2010 and 2011, the child accumulated $500 in CDSG entitlements at a 300 per cent matching rate ($500 x 4 = $2,000) and $1,000 in CDSG entitlements at a 200 per cent matching rate ($1,000 x 4 = $4,000). No CDSBs would be paid, however, since their family income is too high.

If an RDSP is opened in 2011 with a $2,000 contribution, the RDSP will receive $6,000 of CDSGs, representing a 300 per cent match of the four annual accumulated $500 CDSG entitlements. The couple will still have $4,000 of CDSG entitlements at 200 per cent to be carried forward to collect in future years if and when they are able to make sufficient contributions.

Joanne and Kyle could also contribute to their children’s RESP to maximize the 2011 Canada Education Savings Grants (CESGs). By socking away $7,500 (3 X $2,500), the government will contribute $1,500 toward their children’s post-secondary education savings.

So, where does that leave our couple? Well, if Joanne makes $80,000, pays about $16,000 in tax and puts $2,000 into an RDSP and $7,500 into an RESP, she and Kyle are left with $54,500 from which to pay all of the family’s other daily living expenses.

Considering Joanne’s RRSP contribution limit is $14,400 (18 per cent of $80,000), and her TFSA limit is $5,000 for her and another $5,000 that she could gift to Kyle so he could make his own TFSA contribution (ignoring any carry forward of prior years’ unused TFSA contribution room), we have a total additional available registered savings opportunity of $24,400, after contributing to the RDSP and RESP.

But clearly the couple, with three young kids, can scarcely afford to save nearly half of their remaining after-tax income of $54,500 in a registered plan, even taking into account the tax reduction by going the RRSP route. How, then, should they choose between socking any extra funds into an RRSP or TFSA?

While the technically correct answer comes down to comparing Joanne’s marginal effective tax rate (METR) today with what her or Kyle’s METR is expected to be upon retirement — provided the funds are left to grow tax-free for the long term in either plan — choosing a TFSA or RRSP is nearly always preferable to investing surplus funds in a non-registered account.

This is an important financial decision that should not be rushed in the 2011 RRSP season crunch next year. That’s why the slower summer months may in fact be the ideal time to sit down and demonstrate the tremendous value you can add to the financial planning process for your clients.