Hey guys, Coach Julien here. In this video, I’m going to talk to you about the RRSP and RESP programs. I’m going to go through some similarities and differences and also tell you which one is best mathematically based on a set of assumptions. So stay tuned.
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Hi, I’m Coach Julien. I’m here to help people out with money matters, such as saving money, investing money, and also planning and budgeting. If this kind of topic interests you, sign up for my channel, subscribe, hit the bell button, and you’ll get notified whenever I upload new videos.
Agenda:
So, RRSP or RESP, which one is better? I’m assuming you have kids and you have some money to invest. Where are you gonna put it? In the RRSP or are you gonna put it in the RESP? Let’s talk about the similarities and differences between RRSP and RESP.
Similarities and Differences:
First, very quickly, because I have other videos on RRSPs and RESPs that go through in a lot of detail on these programs, you can watch those after this video. But the focus of this video won’t be to drill down on these programs. I’m just going to quickly give you some similarities and differences. I’m going to show you graphically which one performs better over a 20-year timeframe after tax, and then I’ll give you my conclusion as to which one is better.
RRSP and RESP Limits:
First thing is, they both have limits. The RESP has limits per year, up to $2,500 deposit will attract grants. Beyond that, you’re not going to attract any grants, so there’s a cap per year on the grants. The RRSP room, as you probably know, grows based on the previous year’s taxable income, and there’s a cap of around $27,000 to $28,000 a year. Again, my videos go through all that in a lot of detail. You can look at those after this video. The RESP program is limited at $50,000 per child, the federal grant tied to the RESP program is capped at $7,200.
RRSP and RESP Similarity:
A similarity is that both earn investment income taxed at the same tax rates. Let’s talk about RRSP and RESP deposits.
RRSP and RESP Deposits:
When you put money in the RRSP, that deposit reduces your taxable income, and therefore you pay less taxes. But you pay taxes when you take money out. When you deposit money into an RESP program, you’ll get a federal grant of 20% of your deposit, up to a maximum of $500. Depending on the province you’re in, the provincial government will also provide a grant. In Quebec, the grant is 10% of the deposit, up to $250. So in Quebec, if you put $2,500, you could get up to $750 of grant money, which is equivalent to 30%. That’s quite interesting. Let’s talk about taxation.
RRSP and RESP Withdrawals:
The RRSP is taxed fully on withdrawal. So, if you take out $200,000 from your RRSP, you’re going to be taxed as if it’s salary income at a high rate. You get a tax break when you put money in, but you have to pay taxes when you take money out.
For RESPs, the original contribution is never taxed because it’s after-tax money. Otherwise, it would be double taxation. What is taxed, however, is the investment income and the grant money, but only when you take money out.
RRSP and RESP Taxation:
Here’s one of the key differences: RRSP money withdrawals are taxed on you, usually at a high tax rate. On the other hand, RESP withdrawals are taxed on your child, and usually, your child takes the money out when they need it, which is when they’re going to school. Usually, when they’re in school, they’re focused on their studies and not necessarily earning a lot of money. If they’re not earning a lot of money, they’re paying very little tax, if any. There’s an advantage when you take money out of the RESP; you’re only taxed on the investment income and grant portion, and it’s taxed on your child.
RRSP and RESP Expiration:
The RRSP expires when you turn 71. The RESP expires on the 36th year after it’s opened. All of that is covered in my other videos if you take a look. I think it’s important to go through some assumptions.
Key Assumptions Used to Compare RRSP with RESP:
Before I show you the graph that compares the after-tax value of an RRSP versus an RESP, I’m going to give you some of the assumptions that I used.
I always recommend that you crunch your own numbers and get advice for your specific situation. You can get advice from me, another financial advisor, an accountant, or a portfolio manager. If you want to book some time with me, there’s a link to my calendly in the description of the video.
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Make sure to download the first document, which is a step-by-step guide for beginner do-it-yourself investors. I also have a document on how to save money, critical habits to build wealth, stuff that I wish I knew when I was way younger.
RRSP vs. RESP After-Tax Value After 20 Years:
Here’s the core of the video. We have a graph showing the difference between the RESP and RRSP programs based on the assumptions that we looked at. We’re talking about a $2,500 contribution in the RESP program and the RRSP program. The RESP money tax break is invested in a regular account. The RESP money attracts the federal and provincial grants, and you can see that there’s a few thousand, we’re talking maybe a $30,000-$40,000 difference between the RESP and the RRSP. So, in conclusion, the RESP is by far the number one choice. Grant money is free, contributions are not taxed, and you can take those out anytime tax-free. The child is taxed when the investment income and/or grants are withdrawn, and usually, that means zero taxes if you plan it right. That’s the key word, if you plan it right. You gotta plan, just like RRSPs, you need to plan your withdrawal strategy because if you don’t, it could be costly.
Oh, here’s a trick. Let’s say you have two children. Okay, one is enrolled in a post-secondary education program, the other not yet, they’re younger. What you could do is take money out from one child’s original contributions and deposit it into your younger child’s RESP. This way, the same contribution will attract grants, and if you have three children, the same contributions can attract triple the grant. So that’s a technique I talked about in one of my videos. Make sure to understand that. If you don’t, book a one-on-one with me because it’s pretty important.
Two, if your TFSA and RESPs are maxed, then you can put it in an RRSP. So, that’s my recommendation. And get advice, guys, because every situation is different. Cool! If you want to book a one-on-one with me, you can do that. There’s a link to my Calendly in the description of the video. Hope you enjoyed the video. If you liked it, make sure to like it and subscribe to my channel because I’ve got more content coming. Thanks for watching, folks, and we’ll see you real soon.