Plan confusion: RESP, RDSP, RRSP or TFSA?

With so many plans to choose from, how do we best advise our clients on the optimal tax-preferred savings strategy?

In an ideal world, all our clients would maximize contributions to all their savings plans but in reality, this is simply not feasible for the vast majority of our clients. Don’t believe me?

Take the case of Andrew who earns a healthy $80,000 annually. He is married to Lisa, who doesn’t work outside the home, and has three young children, one of whom has a physical disability entitling him to the disability tax credit.

Andrew has the opportunity to save money in a Registered Disability Savings Plan (RDSP) for his special needs child, to sock away funds in a Registered Education Savings Plan (RESP) for all three of his kids and save the balance for retirement through an RRSP or TFSA. How should he prioritize his registered savings?

RDSP & RESP

I am a firm believer in “free money.” After all, if the government is willing to give you money to help you save, why not take full advantage of this?

Let’s begin with the RDSP. By contributing a mere $1,500 to an RDSP for his son, the government will contribute $3,500 in Canada Disability Savings Grants (CDSGs) for a total first year plan value of $5,000. That’s because if family income is under about $83,000, CDSGs are equal to 300% of the first $500 of annual contributions and 200% on the next $1,000 for a maximum annual entitlement of $3,500.

Next, Andrew should consider contributing to his children’s RESP to maximize the 2011 Canada Education Savings Grants (CESGs). By socking away an additional $7,500 (3 X $2,500), the government will contribute $1,500 towards their post secondary education savings.

So, where does that leave Andrew?

If he makes $80,000, pays tax of about $21,000 and puts $1,500 into an RDSP and $7,500 into an RESP, he is left with $50,000 from which to pay all his other daily living expenses.

Considering his RRSP contribution limit is $14,400 (18% of $80,000) and his TFSA limit for 2011 is $5,000 for him and another $5,000 which he could gift to his wife Lisa so she could make her own TFSA contribution, we have total available registered savings opportunity of $24,400.

But if Andrew only has $50,000 after tax and after maximizing the RDSP and RESP contributions necessary to get the maximum in grants, with three young kids, he can scarcely afford to save half of this in a registered plan (despite perhaps reducing part of the tax bill by going the RRSP contribution route.)

How then does Andrew choose to allocate scarce savings resources between the RRSP and TFSA?

It was this question that caused me to write my most recent research report on TFSAs and RRSPs entitled, “Blinded by the “Refund”: Why TFSAs may beat RRSPs as better retirement savings vehicle for some Canadians.”

As advisors, perhaps the most valuable role we can play this RRSP (or should it be TFSA?) season is engaging in a dialogue with our clients about which plan serves them best.

What will you be recommending this season?

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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