Free money: How to get the most government cash through your RRSP, RESP and TFSA

Free money? Yes, please. (Tumblr)

They say nothing in life is free, but when it comes to funds invested in the right savings vehicles, ‘free money’ is part of the deal. Many Canadians aren’t taking advantage of these perks. A recent poll by Knowledge First Financial, for example, found that more than half of Canadian parents say they are not taking advantage of the grants available through the Registered Education Savings Plan (RESP).

Savings plans registered with the Government of Canada come with benefits that often mean savvy savers catch a break from the taxman or receive grants to help them save for the future. On the flip side, it also leaves some wondering where they should park their money to receive the maximum benefit. We spoke to Brian Burlacoff, financial advisor with Sun Life Financial for a rundown of the best strategies to maximize your investment.

A joint strategy works best

If you’re looking to get the most ‘free money’, a joint strategy works best, says Burlacoff. He cites the example of the saver who has $2,500 to invest and has a sharp focus on their child’s education. The saver might gravitate towards focusing entirely in an RESP to enjoy the maximum annual government grant of $500 that comes with this type of plan. Alternately, however, they could invest that $2,500 in the Registered Retirement Savings Plan (RRSP), receive a tax refund of up to $1,250 if they’re in the top marginal income tax bracket, and put that $1,250 into the RESP to receive $250 from the government. As a result, the saver now has $1,500 from the government instead of just $500.

It’s important to note, however, that the RRSP refund isn’t entirely free; funds held within the plan are taxable upon withdrawal at the marginal tax rate you fall within at that point. This is why the RRSP is most beneficial to those who fall within relatively high tax brackets and anticipate falling into a lower bracket upon retirement.

Don’t forget the trusty TFSA

Burlacoff notes that if the goal is to have the government help you with an immediate savings goal, the Tax-Free Savings Account (TFSA) can be ruled out. Investment income grows tax-free within the account, but it doesn’t offer an additional incentive or refund like its registered counterparts. For those in the first marginal tax bracket, he suggests that the TFSA could be more advantageous than the RRSP because there’s essentially no tax benefit to receiving a tax refund and subsequently paying back the same amount come retirement. Although it doesn’t offer an immediate cash incentive – ‘free money’ – the benefit of tax-free investment earnings can be substantial if your money is invested with a high return.

Using the joint strategy again, instead of simply investing in a TFSA, it could make sense to invest in the RRSP and use the refund to invest in the TFSA to max out both.

When it comes to leveraging your money, it all depends on your life stage and your priorities. If you’re looking to receive the maximum benefit from the government, think outside the box and use a joint strategy to get the most out of each savings vehicle. Take a look at your goals, your income and your time horizon to decide what works best for you and your family – and don’t leave free money on the table.

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