Don’t leave $$ on the table

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  By Guest Blogger Sinan Terzioglu

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Many of us are missing out on the advantages of various registered savings plans and leaving money on the table. While participation rates in Tax Free Savings Accounts (TFSA) have been rising and now exceed participation rates in Registered Pension Plans (RPP) and Registered Retirement Savings Plans (RRSPs), there are additional savings plans that many are not aware of and should be taking advantage of.

Registered Disability Savings Plan (RDSP)

According to a 2020 Statistics Canada survey, less than one-third of Canadian residents eligible to open a Registered Disability Savings Plan (RDSP) have done so. A 2022 Canadian Survey on Disability found 27% of those aged 15 years and older, or approximately 8 million residents, had one or more disabilities that limited daily activities. Nearly half of those eligible to open an RDSP have never heard of the savings plan, therefore, far too many are missing out on the long term financial benefits RDSPs offer.

To be eligible to open an RDSP, a beneficiary must qualify for the disability tax credit (DTC), and be a Canadian resident under 60 years of age. There is no minimum age requirement for an individual to be an eligible beneficiary of an RDSP so they can be opened for the benefit of minors with a legal guardian as the account holder.

The lifetime contribution limit is $200,000 with no annual limits. Contributions are not tax-deductible but can be made by anyone until a beneficiary turns 59. The funds grow sheltered from tax until withdrawn. Withdrawals from RDSPs, called Disability Assistant Payments (DAP), can be made by the beneficiary at any time and be used for any purpose. Mandatory withdrawals, called Lifetime Disability Assistance Payments (LDAPs), must begin by the end of the year a beneficiary turns 60.

One of the key features of RDSPs is the potential to receive Canada Disability Savings Grants (CDSG). The CDSG provides matching contributions of up to $3,500 per year ($70,000 lifetime limit) until December 31 of the year a beneficiary turns 49. Grants range from 100% to 300% of contributions and are dependent on the total family net income for the year.

In addition to grants, lower-income families may also qualify for the Canadian Disability Savings Bond (CDSB) which is paid into an RDSP up until the end of the year in which a beneficiary turns 49 ($20,000 lifetime limit). Families with a total net income of less than $53,359 may be eligible to receive an annual bond of up to $1,000 even if no contributions have been made to an RDSP so simply opening an RDSP for eligible beneficiaries of lower income families is well worth it.

First Home Savings Account (FHSA)

Since becoming available in 2023, approximately 300,000 FHSAs have been opened across Canada. The annual contribution limit is $8,000 and the lifetime contribution limit is $40,000. As with RRSP contributions, cash contributions and in-kind contributions from a non-registered account to an FHSA are tax-deductible. Contributions from an RRSP to an FHSA are permitted but the disadvantage of contributing this way is there is no additional tax-deduction.

FHSAs can stay open for up to 15 years and the investments grow sheltered from tax. If the funds are withdrawn and used for the purchase of a qualifying first home the entire withdrawal will be tax-free. If a home is never purchased all the funds in an FHSA can be transferred to an RRSP/RRIF (taxes deferred) even if you don’t have any available RRSP contribution room.

To open an FHSA you must be a Canadian resident, 18 years or older and under 71 years old on December 31 of the year you open an FHSA. In order to be considered a first time buyer you must not have lived in a qualifying home as your principal residence that you owned (or owned jointly) in this calendar year or in the previous four.

There are very few scenarios when it does not make sense to open a FHSA. Even for Canadians that never intend to purchase a home contributing and investing in a FHSA can be very beneficial because at worst it’s just additional RRSP contribution room.  As is the case with RRSP deductions, you don’t have to claim the tax-deductions for FHSA contributions in the same year and they can be carried forward to future years which makes sense for those that anticipate being in a higher tax bracket in the future.

Registered Education Savings Plan (RESP)

An RESP is a long-term investment plan designed to help family and friends (subscribers) save and invest money for a child’s post-secondary education. Funds grow sheltered from tax until withdraw. Contributions are not tax-deductible but when withdrawn they are taxed in the hands of the beneficiaries which often is the lowest tax bracket. According to Statistics Canada, a little over 50% of families have a RESP so many are missing out on the benefits of this savings plan.

The biggest advantage of a RESP is that every beneficiary can get the basic Canada Education Savings Grant (CESG) of 20% on the first $2,500 of contributions each year. The lifetime contribution limit for a RESP is $50,000 (no annual limits) and the maximum lifetime CESG is $7,200. In order to receive the maximum amount of grants a subscriber would have to contribute $2,500 per year for a little over 14 years.

The government allows RESP subscribers to catch up on missed grants one year at a time. So, for a child that was born in 2023, a subscriber can contribute $5,000 in 2024 and receive the maximum $1,000 annual grant ($500 for 2023 + $500 for 2024). It’s the easiest 20% you will ever make but in order to fully maximize the long term benefits families should start contributing to an RESP as soon as possible.

Your Plan

With limited funds and a handful of registered savings accounts you and your family may be eligible for, it can be difficult to decide which accounts are best for you to prioritize contributing to. Everyone’s goals and circumstances are different so there is no one-size-fits-all approach.

A good place to start is to ensure you are taking advantage of all employer matching contributions in group savings plans. For higher income families starting with tax-deductible contributions to RRSPs and FHSAs often makes the most sense and for lower income families starting with TFSAs and RESPs may be most beneficial. Taxes will very likely never go down in our lifetimes so it’s important to maximize all tax-advantaged accounts we’re eligible for.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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About the picture: “Hi Garth, been reading your blog for years and have not only learned a lot but I also get great amusement daily from the humor you inject!” writes Eric in S. Ontario. “We absolutely cannot let the cats win so here is a picture of my 2 Labradoodles Benjamin and Oliver out with their dog walker in Sleepy Waterdown. On a side note one realtor has 3 brand new detached Greenpark homes for sale down the street( literally all 3 in a row lol). Guess things are so bad that they’re even competing against themselves?”