Registered Retirement Savings Plan (RRSP)

Tax-sheltered meaning you get a tax credit when you contribute towards it (lowers your taxable income) BUT you pay taxes when you withdraw the money at the time of retirement

• 18% of your income
• Maximum of $27,230 for 2020 or an income of $151,277.78
• Maximum of $27,830 for 2021 or an income of $154,611.11
• You can withdraw the money before retirement but you’ll pay full income taxes on it and a 10% penalty.

This means if you make $60K a year and you take out $10K from your RRSP, you’ll pay taxes on $70K of income PLUS a tax withdrawal on the $10K, or an extra $1K in taxes which can be applied to your taxes for that year.

The government basically holds back the taxes on the withdrawn RRSP amount, and you can report that income on your income taxes as “prepaid”

Tax rates on withdrawals

Not a great emergency fund, consider this money locked in.

Can be dipped into to use for buying a home for the first time up to $25K to be borrowed and paid back over 10 years on a fixed schedule, OR used for education.

RRSP Strategy

Mine is maxed.

I have no RRSP room as a freelancer because I take dividends and not a salary (you need a T4 earned income to gain RRSP room), but I compensate by contributing hard to my TFSA.

I put my U.S. holdings in here because I don’t pay that extra 30% withholding U.S. tax if I do due to the Canada/U.S. tax treaty, and I leave it for the long term in index funds.

Tax-free Savings Account (TFSA)

Tax-deferred meaning you don’t get a tax credit when you contribute to it BUT you won’t pay taxes when you take the money.

You can take the money any time you want with zero penalty.

Maximum for 2020 is $6000

Between the RRSP and TFSA, this one is best used as an emergency fund or fallback Plan C if you’re in need of money.

Everything grows in there – capital gains, dividends, with NO taxation aside from the year you contributed.

TFSA Strategy

I max it yearly.

I have some money in my unregistered accounts, so I always transfer high-performing investments over to my TFSA rather than putting in amount from my savings account each year.

I put dividends and capital gain stocks in here.

Registered Education Savings Plan (RESP)

• Not tax-sheltered or tax-deferred.
• Unlimited contributions (no cap)
• You can put all $50K in there the day they’re born but I’d advise against that.
• Lifetime RESP contribution limit of $50,000

If you start the year they’re born, that means it is an $2777 annual contribution a year until the age of 18 to reach the $50,000 cap

20% Lifetime Canadian Education Savings Grant (CESG) Bonus

Contribute a max of $2500 a year to get the government 20% match ($500 in free money) from the

If your family income is lower you can get up to a 40% match:

• $200 extra if your net family income is $40,970 or less;
• $150 extra if your net family income is between $40,970 and $81,941.

CESG government matching lifetime limit of $7200

$7200 lifetime limit on a CESG match which means if you’ve contributed $36,000 to the plan, you’d have maxed out the government contributions and will receive no more extra bonus money.

If you start the year they’re born, that means it is a $2000 annual contribution a year until the age of 18 to reach $36,000.

Little Bun RESP strategy

I’m contributing $2500 a year to obtain the 20% match until our lifetime $7200 contribution is fully maxed out which will be around the time he is 15, and hopefully he will have taken over those accounts, to manage his own investments.

The extra money he will have, will be saved aside in an unregistered account, as a mix of cash in a high interest savings account and investments in index funds and large cap stocks.

That money will be used towards private secondary schooling, estimated at $5000 a year from age 12 to 17, or 5 years, so we will need $25K or more due to inflation.

Any extra money leftover will be given to him to manage on his own when he starts school for whatever he thinks is prudent, with some very strong, sage advice from his parents of course. I’d definitely encourage him to invest that money instead and will be showing him (fun but compelling) compounding interest graphs.

Do not be fooled by the word SAVINGS

You should always invest all of this money in any of these accounts into the stock market.

Putting it into a high-interest savings account is a real waste of these accounts. It makes me sad (truly) when people put cash in these accounts and think things will be fine.

You will not become rich just by saving alone. You need to invest that money and take advantage of compounding interest in the stock markets to grow your cash.

If I had invested my $14K from my old RRSP into a savings account, you know what I’d have today?

$16,800.

Instead, I invested it, let it grow and it is now worth $33,000.

That’s a difference of $16,200!!

That’s almost DOUBLE the hypothetical savings balance had I not put it into an index fund and left it.

Imagine that money now in 30 years when I’m going to take it to retire. I’d have at least $100K in there, but if I left it in savings, I’d have $25K instead or a quarter of its potential.

Would you rather have $25K or $100K?

Scale back as you get closer to when you need the funds

For the RESP, as they near the age 10, I’d scale back on stocks, and move it into more stable investments like cash or bonds because you want that money there and ready for when they’re 18 and about to start school.

You don’t want the volatility of a moving stock market and then hit a recession just as they start school.

Same with the RRSP as you move towards retirement, shift it to more stable sources.

I plan on having about 50/50 in stocks versus bonds/cash by the time I retire because I still want my retirement nest egg to grow but I don’t want any surprises.

I haven’t fully worked out my strategy for my retirement yet, but I suspect I’ll be able to not touch any capital and just live off my side income, adjusting my lifestyle as I see fit.