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By Guest Blogger Sinan Terzioglu
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With the start of a new year, there’s additional contribution room for tax-advantaged accounts like the Tax-Free Savings Account (TFSA) and First Home Savings Account (FHSA), along with education grants for the Registered Education Savings Plan (RESP). Despite this, many Canadians are not taking full advantage of these accounts, missing out on valuable opportunities to shield their savings from taxes.
Paul in Ottawa recently asked:
My wife Andrea and I are in our mid-30s, with a 3-year-old son and another child on the way. We rent our home and both work for the government, each earning about $75,000 annually. We’ve saved $150,000, primarily in RRSPs, with some in TFSAs. Given the high cost of buying a home, we don’t plan to purchase and are content with being long-term renters. We’re considering whether opening FHSAs is worthwhile. We both have defined benefit pensions, but I’m uncertain about staying in government work for my entire career and have heard that commuting my pension might be an option to explore. I would appreciate your advice on a savings strategy for us moving forward.
It seems that, like many Canadian families, Paul and Andrea have not yet set up a Registered Education Savings Plan (RESP) for their son. I suggest they open a family RESP as soon as possible. Once their second child is born, they can add him or her to the RESP, enabling the funds to be shared among their children. This can be advantageous if one child decides not to pursue post-secondary education.
When contributions are made to RESPs, the government matches 20% of the contributions through the Canadian Education Savings Grant (CESG) on amounts up to $2,500 per year. The lifetime contribution limit per beneficiary is $50,000, and the maximum lifetime grant amount the government will provide is $7,200, available until the end of the year the beneficiary turns 17. The government allows RESP subscribers to catch up on missed grants one year at a time. Therefore, Paul and Andrea should contribute $5,000 to their son’s RESP in 2025, so they can receive grants totaling $1,000 ($500 for 2025 and $500 for a missed year) and $2,500 for their newborn. It’s essentially the easiest 20% return anyone can make.
Since the TFSA was introduced in 2009, the cumulative contribution limit has reached $102,000, meaning couples can contribute up to $204,000. This is an incredible opportunity for young couples to grow their savings tax-free for life. TFSAs offer flexibility, allowing you to withdraw funds without losing contribution room, which can be beneficial in certain situations, such as making contributions to other tax-advantaged accounts. For example, Paul and Andrea could consider withdrawing funds from their TFSAs to contribute to their RESP. However, any amounts withdrawn from TFSAs can only be re-contributed during the following calendar year or later.
Since both Paul and Andrea have defined-benefit pensions, I recommend they prioritize contributing to their TFSAs before their RRSPs. Upon retirement, their pension income, like RRSP/RRIF withdrawals, will be fully taxable. By maximizing their TFSA contributions over time, they can be in a stronger position to supplement their retirement income with tax-free withdrawals potentially allowing them to stay in a lower tax bracket and reduce their overall tax burden.
If Paul decides to leave his government job in the future, he will likely have the option to commute his pension. He woiuld be wise to consider this because it would provide him and Andrea with more flexibility, control, the potential for higher retirement income, and the opportunity to leave a larger estate for their family. Given the likelihood they will seriously consider commuting Paul’s pension, I suggest Paul accumulate RRSP contribution room so that he can have the ability to transfer the cash portion of the pension payout into his RRSP and defer taxes.
Even though Paul and Andrea don’t plan to buy a home, they should each open a First Home Savings Account (FHSA). For lifelong renters, FHSAs effectively provide additional RRSP contribution room. Contributions to FHSAs, like RRSPs, are tax-deductible, and any unused deductions can be carried forward and claimed in future years if it makes sense from a tax perspective.
Funds in FHSAs grow tax-free until the accounts must be closed in 15 years. If Paul and Andrea are still renting at that time, they can transfer the assets in their FHSAs to their RRSPs tax-deferred, even without available RRSP contribution room. However, if they think there’s a possibility they might want to buy a home in their 50s or later, I suggest they wait a few years before opening FHSAs due to the time limit on how long FHSAs can remain open. This way, they retain the option to withdraw all the funds from their FHSAs tax-free for a potential home purchase.
Given that taxes are unlikely to decrease significantly in the future, it’s crucial for couples like Paul and Andrea to fully utilize tax-advantaged accounts such as TFSAs, RESPs, FHSAs, RRSPs, spousal RRSPs, and RDSPs to optimize their savings.
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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