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RRSP or RESP: Canadian parents forced to make tough choice

Gail Johnson

Rebekka Kirk started making monthly contributions to her Registered Retirement Savings Plan (RRSP) more than a decade ago. But when she became a mom in 2010, things got a little more complicated during RRSP season.

She'd never even heard of a Registered Education Savings Plan (RESP) until her financial planner suggested she and her husband put money aside for their daughter's education.

The Vancouver-based fitness-centre manager didn't hesitate, especially after finding out the government matches contributions by 20 percent up to $500 per child through its basic Canada Education Savings Grant (CESG).

"It's like free money; that's the way I look at it," Kirk says. "It's a win-win with the government adding contributions to her future. We want to make sure that she doesn't have to struggle to follow her dreams."

Finding balance is possible

But Kirk wasn't about to forfeit saving for her retirement either, so she and her spouse decided to do both. Now, every month they put $25 into their daughter's RESP and $50 into their RRSPs.

"While our daughter's future fund is important, so are our retirement savings," she says. "Neither of us has pensions from our employers, and the amount that we'll get from the government pension won't be enough to pay our most basic expenses.

"We don't even notice the $75 that is automatically withdrawn every month," she adds. "It's so rewarding to look at the amount saved at the end of the year."

While Kirk found a strategy that suits her and her family, for many parents, deciding between RESPs and RRSPs or deciding to contribute to both can be a daunting process.

RESP basics

A child can use the money from the basic CESG for full-time or part-time studies in an apprenticeship program, CEGEP, trade school, college, or university.

Besides the basic grant, there's also the Additional Canada Education Savings Grant (A-CESG) that some people are eligible for. The amount of money awarded depends on a family's net income: an additional payment of 10 percent on the first $500 of annual RESP contribution goes to families with a net income of $42,707 or less, which is on top of the 20 percent given to those whose income is between $42,707 and $85,414.

There's no yearly limit for RESP contributions, but the lifetime limit per child is $50,000. The government's CESG maxes out at $7,200.

Keep in mind you'll need a social insurance number for your child to open an RESP.

What type of investment to choose?

Smarter Financial Planning Ltd. financial advisor Derek Moran says deciding on an investment vehicle for either an RRSP or RESP depends on people's unique circumstances.

"Both are tax-deferred plans, meaning that in the accumulation years, annual investment income within the plan is not taxable," Kelowna, B.C.'s Moran says. "In quantifying the best investment, one would have to look at the perks that come with each, in one case a 20-percent match to a max of $500 annually per kid and with the other a tax refund at the individual's marginal tax rate, which could be anywhere from zero to the high 40-percent range.

Moran adds RRSPs and RESP are not the only option when it comes to saving for retirement or future education costs.

"Maybe the individual or his or her spouse has a gold-plated federal-government pension or is a public school teacher or RCMP [member], who also have excellent pension plans. Maybe the grandparents are fully committed to funding education costs … In such a case the parents might not be required to save for their own children's education.

"Every situation is so different so we can't generalize, but I do think we can help by asking good questions."

Retirement or eduction: What do you value more?

Deciding which kind of registered plan to put money into requires parents to dig deep and be honest about their values, says Calgary financial planner John Amonson.

"Having done this sort of work for a lot of years now, I am convinced that paying attention to behavioural economics is often more fruitful that paying attention to traditional financial optimization," the president of Unbiased Wealth Management Inc. says.

"More specifically, fining a strategy that motivates a client is often more important than finding the optimal financial solution. A good example is debt repayment. We are all trained that clients should start a debt-repayment strategy by paying off the debt with the highest non-deductible interest rate.  Makes sense. However, it often fails to work as well as having clients pay off their smallest deft first, then the next smallest, and so on.  Why? Because they get motivated.

"In the case of RRSP and RESP matters, it likely boils down to the client's value system and then down to what motivates them."

He says that it helps for people to focus on one or two financial goals at a time.

"Once they have success at that, then they can move on to another goal," he says. "They need to identify something that motivates them. Whether it's their child's education or a new SUV, they need to be clear on their values so they can that set objectives that motivate them and then follow through on those goals."

For Kirk, contributing to both RESP and RRSPs has given her a sense of control over her family's future.

"Before we went to see our financial planner, the discussions of money were challenging and scary, especially in this economy and because we're now parents," she says. "Our planner showed us that we had the power to minimize our debt and put aside money for the short term and the long term and that we didn't need to be making a huge salary to do so."