Savings

Introduction: Youth Financial Literacy

 

In a National Report Card on Youth Financial Literacy (2011), Canadian high school graduates between the ages of 17 and 20 were asked questions related to their financial experiences and knowledge.

 

♦ 93% agreed it was important to build savings and 60% already had savings.

 

♦ 58% did not know the interest rate on their bank account and 65% did not shop around before opening their last bank account.

 

♦ 60% indicated they were at least somewhat knowledgeable about RRSPs, 53% about TFSAs, 52% about investing money, and only 29% about GICs.

Creating a savings plan


♦ Make a budget to track how much money you are spending and how much you can manage to save. When you know approximately how much you can save each month, you can calculate your potential savings (with interest) over a long period of time using a savings calculator.

                                                                                  

♦ Savings accounts can be opened at a bank or credit union. You can transfer money from your chequing to your savings account using online banking.  You can also choose to have an automatic amount transferred into your savings account(s) at certain times (e.g., once a month).

 

◊ Automatic payments can help you keep on top of your savings, however it may be difficult if your income and expenses are variable.

Banks

 

♦ When you are choosing a bank, consider interest rates, banking fees, and the services offered. There are often special offers for students.  You can have an account at more than one financial institution.

                                                                                      

◊ You can visit www.ratesupermarket.ca to compare fees and interest rates at different banks.

                                                                         

♦ Online banks (e.g., Ally, AcceleRate Financial, Tangerine) are becoming more popular may be able to provide all the services you need.

 

◊ In some cases, they will offer higher interest rates on savings than traditional banks.

 

◊ Make sure they are a member of a deposit insurance plan.

 

◊ Find out the cost of e-transfers to/from other banks.

 

◊ If applicable, make sure that you can deposit student loans into these accounts.

                                                                                                                                        

♦ Contact banks or visit their website to find out how to open an account and what documentation is required.

Credit unions

                     

♦ The services offered by credit unions are very similar to those of banks. The key difference is that when you deposit your money in a credit union, you are buying shares of the company (you are a partial owner).

                                                                                                                                                                    

♦ Credit unions are not run for profit, therefore any profit that is made is used to give its members advantages:

 

◊ Credit unions can be good for savings because they often offer better interest rates than banks.

 

◊ Generally, credit unions have fewer and lower fees for services compared to banks (though not in all cases).

 

◊ A new program called ding free allows credit union members to use ATMs across Canada without surcharges. Transaction fees may still apply if you exceed your allowable limit on ATM transactions.

 

♦ A downside of credit unions is that, because they are small and localized, they do not always offer the same speed and convenience as banks. 

 

◊ Some services, such as financial transactions between banks (particularly international transactions), may be faster and cheaper through a bank.

 

◊ Credit unions generally are not open as often as banks (i.e., fewer evening/weekend hours).

 

 ♦ Contact credit unions or visit their website to find out how to open an account and what documentation is required.

Banking services

 

Online banking: Most banks and credit unions offer free online banking. Transactions are easier to do online than having to go into your branch and may be cheaper. You can pay your bills online (including your credit card), transfer money between accounts, create TFSAs, and keep track of your money.

                                                                                                                  

ATM card: To make payments directly from your bank, ask your financial institution about getting an ATM (debit) card.

 

Cheques: If you want to be able to write cheques, you will have to order them from your financial institution.

I am moving, how do I open a new bank account?

 

♦ If you already have a bank account, contact your current financial institution to find out what services will be available in your new location:

 

◊ Are there branches that you will be able to access?

                                                                                                                          

◊ Will you be able to use ATMs without additional fees?

 

◊ Will you able to pay your bills through online banking?                                   

 

◊ Will a new employer be able to make direct deposits to your account?

                                                                                                                                            

♦ If the services are limited (especially for international students), you will probably have to open a new bank account.

 

◊ You may want to find a few conveniently located banks/credit unions, then compare them by visiting their websites or calling to ask about their student accounts, interest rates, fees and services.

 

◊ It may be possible to open an account before you arrive, or you may have to arrange an appointment to set up an account. Ask what documentation you will need, such as a passport, student card, proof of full-time student status, and/or study permit.

 

◊ There may be some fees that apply, such as fees to wire money to your new account.  

                                                                          

◊ If you are an international student, visit your post-secondary institution’s international centre for students (or check their website) for more information.

Chequing accounts


♦ A chequing account is the most basic financial account that you will use for most transactions, including direct deposit, paying with your debit card, or writing a cheque.  You will earn almost no interest. 

 

◊ Accounts without fees are often available for students, account holders under a certain age, or for account holders who receive monthly direct deposits.

 

♦ Learn more about chequing accounts here.

Savings accounts

 

♦ Savings accounts earn higher interest than chequing accounts. A basic savings account will give you easy access to your funds and you should be able to easily transfer money online between chequing and savings accounts.

 

◊ Some banks may offer high-interest savings accounts, however there may be more regulations involved (e.g., a minimum deposit).

 

◊ Combined chequing/savings accounts usually offer interest rates between that of a regular chequing account and a regular savings account.  This is an option if you do not have savings but would like to earn a bit more interest on your account. However, additional fees may apply compared to a regular chequing account.

 

♦ Learn more about savings accounts here.

 

♦ If you open a Tax-Free Savings Account, you will not have to pay taxes on the interest you earn (learn more below).

Investments

                                                                                                               

♦ If you want to save money over a longer period of time, you can invest it into an account that offers a higher interest rate. The government offers certain benefits if you make investments within a Tax-Free-Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and Registered Education Savings Plan (RESP).

                                                                                                                                                                                                              

♦ Having a budget is a good way to figure out how much money you can invest and for how long. Investments including GICs, mutual funds, stocks, and bonds can be made as a TFSA, RRSP or RESP.  Your financial institution will provide you information on minimum amounts, investment terms, and interest rates.   

 

◊ Guaranteed Investment Certificates (GICs) are low-risk investments.  Generally, the longer your investment term, the higher your interest rate.  However, it can be difficult to lock away money for several years and there can be a penalty if you take out your money early.

 

◊ Stocks, mutual funds, and bonds are riskier investments, but can potentially lead to higher returns.


◊ For more information, the Financial Consumer Agency of Canada provides a guide on investment decisions and GetSmarterAboutMoney.ca outlines differences between investments and the pros and cons.

What is a TFSA?


Tax-free savings accounts can be opened if you are 18 years and older.  You are not taxed on withdrawals or earned interest.  

 

♦ There is an annual limit for investment : $5,000 since 2009 and $5,500 since 2013.  Unused contribution room is added to your limit each year.  If you take money out, you can re-contribute that amount the following year.

 

♦ For post-secondary students, TFSAs are a great option for investing in short-term goals.

 

◊ With a basic TFSA, you can withdraw your money at any time without paying a fee.

 

♦ Investments including GICs, mutual funds, stocks, and bonds can be made as a TFSA.

What is an RRSP?

                                                                                    

Registered Retirement Savings Plans are intended to help Canadians save for their retirement.  The amount you invest is tax deductible (the amount you put in is subtracted from your income that year).  You pay tax on your withdrawals and earned interest when you take it out.  Therefore, it is a deferral of tax.

 

♦ You might think that it’s too early to start thinking about retirement. However, this case illustrates why starting early will give you more money, even if you contribute less:

 

◊ Amy who invests $15,000 from age 20 to 34 ends up with $141,700

 

◊ Amanda who invests $35,000 from age 30 to 64 ends up with $118,100

 

♦ Use this RRSP savings calculator to estimate how much your savings will be worth. 

 

♦ The amount of money that can be contributed to an RRSP in one year, without any tax implications, is called the RRSP deduction limit. It is also referred to as contribution room, which is determined by the income you report on your tax returnevery year (up to a maximum).

 

♦ Investments including GICs, mutual funds, stocks, and bonds can be made as an RRSP. 

 

♦ You are able to access money from your RRSP with two plans:

 

The Lifelong Learning Plan (LLP) allows you to withdraw money from your RRSPs to finance full-time training or education for you, your spouse, or your common-law partner.

 

The Home Buyers’ Plan (HBP) allows individuals to borrow money from their RRSPs in order to buy or build a home.

Should I open a TFSA or RRSP?

 

♦ For TFSAs, you invest money that has already been taxed. For RRSPs, you invest pre-tax dollars that are taxed when you withdraw them. Eventually, you will probably want to have both types of accounts.

 

♦ A TFSA is geared towards savings for a variety of purposes, rather than only retirement. When you are making more money, you will have the advantage of making tax-free withdrawals from your TFSA.

 

♦ As a student, you will benefit less (or not at all) from the tax break you receive for depositing money in a RRSP. RRSPs are more beneficial if you are in a higher income bracket and contributing reduces the taxes you have to pay.

 

♦ More information:

 

◊ The Young and Thrifty blog weighs the pros and cons of TFSAs and RRSPs.

 

GetSmarterAboutMoney.ca outlines the basic differences between TFSAs and RRSPs.

 

◊ A Globe and Mail article looks at how age and income should impact your choice of TFSA or RRSP.

What is an RESP?

 

A Registered Education Savings Plan (RESPs) is an account offered by the federal government designed to help parents (and others) save for a child’s future post-secondary education. The great advantage of this account is that the government provides free money for contributing, called Canada Education Savings Grants. Some provincial governments offer additional incentives (see below).

 

The rules surrounding RESPs can be confusing and can lead to difficulties in getting maximum grant money, withdrawing funds, and more. Here, you can learn the basic rules to know how to maximize education savings and effectively manage the withdrawal of your RESP funds (with the account subscriber). If you don’t have an RESP yet, it may not be too late to start (find out more below).

Types of RESP plans

 

An RESP is opened by a subscriber (e.g., your parents) for a beneficiary (e.g., you) who is intended to receive the funds in the future. There are different types of plan with different rules.

 

♦ An individual plan can be opened for you by anyone, including family members, people who are not related to you, and yourself. Only one person can be named as a beneficiary and they can be any age.  

 

♦ A family plan can be opened for you by your parents, grandparents, great-grandparents or siblings. The subscriber can also name additional beneficiaries who are related to them by blood or adoption, as long as they are 21 years or younger when they are named.

 

◊ Although the funds for multiple children can be in the same account, the same limits on grant money apply to each child. For example, parents cannot maximize the grant money for two children and then withdraw all the grant money for only one child. Contributions and withdrawals need to be tracked for each individual child, or you are at risk of losing grant money.

 

♦ A group plan (or scholarship trust) is a pooled savings account offered by an institution that manages the savings of many families. You are eligible for the benefits of an RESP (and benefits specific to the group plan), however group plans will have additional rules and regulations. This may include having a fixed amount you need to contribute, additional fees, and restrictions on eligible PSE programs.  

 

◊ A subscriber who chooses to go this route must carefully read the rules and regulations and be confident they can commit to a long-term payment schedule.

How to open an RESP


An RESP is opened by a subscriber (e.g., your parents) for a beneficiary (e.g., you). The rules about who can be a subscriber or beneficiary depend on the type of plan. RESPs are offered by many providers, including banks and credit unions. The Social Insurance Numbers (SINs) of the subscriber and the beneficiary are needed to open an account.

 

Different RESP providers have different fees and rules surrounding RESPs and they may offer different services. The CanLearn website has a comprehensive list of questions you should ask your provider before opening an account.  Before you do this, you should learn about RESPs, as you cannot always be sure your bank is giving you accurate information.  Carefully review the contract before signing it and make sure you are receiving all the grants you are eligible for.

 

Money that is in an RESP belongs to the subscriber right until it is withdrawn for the beneficiary. If multiple family members and friends want to contribute to an RESP, consider having a single account for all contributions which is under the control of parent(s) or other principal caregiver(s).

What are Canada Education Savings Grants?

 

Canada Education Savings Grants (CESGs) are part of your Educational Assistance Payments (EAPs).  All the values below are from 2014.

 

♦ For the basic CESG, the government will add $0.20 to your RESP for every dollar contributed, up to $2,500 in contributions and $500 in grant money per year.    

 

♦ You can “catch up” on missed grant room one year at a time, therefore you can contribute up to $5,000 and receive $1,000 in grant money in one year.

 

◊ If money is withdrawn from an RESP, the associated grant room is lost forever.

 

♦ Beneficiaries from low-income and middle-income families can earn an additional CESG of 20% or 10% on the first $500 or less contributed to the RESP annually.

 

♦ The maximum amount a child can receive from both the basic and additional CESGs in a lifetime is $7,200.

 

♦ You will only receive government grants until the end of the calendar year when you turn 17 years old. Beneficiaries who are 16 and 17 years of age will only receive CESGs if a certain amount of money is contributed before the end of the calendar year in which they turn 15, see the conditions here.

RESP investments

 

Interest earned on your RESP funds is part of your Educational Assistance Payments (EAPs). RESPs can be invested into GICs, mutual funds, stocks, and bonds, just like TFSAs and RRSPs.  Your financial institution will provide information on minimum amounts, investment terms, and interest rates.             

Provincial education savings programs for RESPs


Alberta, Saskatchewan and Quebec have additional incentives for RESP holders. In all cases, applications must be made through your RESP provider, but not all RESP providers offer all grant/incentives.

 

♦ If you have a parent or guardian who was or is a resident of Alberta, you may be eligible for the Alberta Centennial Education Savings (ACES) Plan. If you turned 8, 11 or 14 in 2005 or later, the ACES will contribute $100 to your RESP if you meet certain conditions. You have 6 years to apply for each grant.


 ◊ Independent students can apply for the grant based on their own residency.

 

♦ The Saskatchewan Advantage Grant for Education Savings (SAGES) Program: If you (as the beneficiary) are a resident of Saskatchewan at the time when contributions to an RESP are being made, you can receive a 10% grant (up to $250 per year) on contributions until the end of the year in which you turn 17.

 

♦ The Quebec Education Savings Incentive (QESI) is a refundable tax credit for residents of Quebec less than 18 years old that is paid directly into an RESP.

When is it too late to open an RESP?

 

An individual RESP can be opened by anyone for a beneficiary of any age (including themselves). In a family plan, beneficiaries must be named before they are 21 years old.  The main benefit of RESPs is the additional funding provided by the government. Once these funds are no longer available, you may be better off with another savings plan. See the age limitations of CESGs and provincial incentives in the sections above.

 

♦ If there are no remaining incentives available for you, you may want to look into other savings options (such as a TFSA, see above).

How much can be contributed to my RESP?


If $167 is contributed per month from the time you were born until you turn 17 years old, you will have received the maximum grant money from the basic CESG. If you qualify for an additional CESG for lowe- and middle income families, less money per month can be contributed to reach the maximum. You can "catch up" on missed grant room one year at a time, therefore you can contribute up to $5,000 ($417 per month) and receive $1,000 in grant money in one year from the basic CESG. The lifetime contribution limit is $50,000 per child.

How can I contribute to my own RESP?


If you receive an allowance or have a part-time job, you may want to help contribute to your RESP savings and further increase your grant money up to the maximum amount. You can also ask family members and friends for RESP contributions for your birthday or other occasions.

 

If you are contributing your own money to an RESP for which your parents or someone else is the subscriber, that money now officially belongs to the subscriber. You should keep a record of how much you contribute. Talk to the subscriber about what happens to this portion of the funds if you decide not to enter a post-secondary program.

 

It is possible to create an RESP for yourself (though some RESP providers may have age limitations). If you do so, remember that the rules and limitations apply across all RESPs for which you are the beneficiary. If you and your parents in combination are exceeding the limit for which you will receive grants, you should consider opening a different type of savings account for yourself.

Money for RESPs for lower and middle-income families

 

♦ Children from low-income and middle-income families can earn an additional CESG of 20% and 10% (respectively) on the first $500 or less contributed to the RESP annually. The maximum amount in grant money is $600 for low-income families and $550 for middle-income families.

 

◊ Net income cut-offs for the additional CESGs change every year (see the Canada Revenue Agency for 2013 levels).  Your parents can find out their net family income by checking their Notice of Assessment (add two net incomes if you are married or common-law), their Canada Child Tax Benefit Notice of Determination, or their Goods and Service Tax Credit Notice of Determination.

 

♦ The maximum amount a child can receive from both the basic and additional CESGs in a lifetime is $7,200. Children from low-income and middle-income families can receive more grant money per year, however the lifetime maximum they can receive remains the same.

 

♦ The Canada Learning Bond offers up to $2000 for children whose families receive National Child Benefit Supplement to help give parents a head start on saving for post-secondary education.

 

◊ Parents (or primary caregivers) can receive up to $25 to cover the cost of opening an RESP, $500 to contribute to the RESP immediately, and $100 to contribute to the RESP per year until the beneficiary is 15 years old.

 

◊ The money is part of your Educational Assistance Payments (EAPs) and can only be withdrawn if you enrol in a PSE program.

Withdrawing money from an RESP

 

♦ You will have to provide proof of enrolment in a qualifying PSE program to withdraw funds as the beneficiary. You can do this before you start attending classes. Ask your RESP provider what documentation they require as proof of enrolment.

 

◊ Qualified programs include full-time, part-time and distance learning programs at universities, colleges and other educational institutions if they meet certain criteria.

 

♦ The following rules apply to withdrawing Educational Assistance Payments (EAPs; including interest and government grants):

 

◊ The money is intended for allowable educational expenses, meaning expenses that serve to further a student’s studies (including tuition, living expenses, a laptop, and anything required to support you in the program).

 

◊ For the first 13 consecutive weeks in a PSE program, up to $5,000 in EAPs can be withdrawn for full-time studies and $2,500 for part-time studies.

 

◊ After 13 weeks, there is no limit on EAP withdrawals unless a student takes a break from their studies for 12 months. In this case, the $5000 limit is re-instated.

 

◊ EAP payments can be taken out for up to 6 months after the end of a program (may vary by provider) if they are for educational expenses. Ask your RESP provider if documentation of expenses is required.

 

♦ The contributions made to the RESP do not follow EAP rules. There is no limit on how much can be taken out.

 

♦ Specify to your bank how much in EAPs and how much in contributions you want to withdraw. It is generally a good idea to maximize EAP withdrawals while you can or there is a risk they will become inaccessible in the future (e.g., if you drop out of PSE). However, EAPs are taxable so keep track of how much taxable income you will have to claim that year (learn more about RESP and taxes below).

 

◊ If you have a family plan, do not take out more than $7,200 in grant money for any one beneficiary or you will be subject to paying back excess amounts. Ask your provider for a record of how much grant money is being paid to each beneficiary.

What happens to an RESP if I do not enrol in a PSE program right away?

 

 ♦ RESPs can stay open for up to 36 years, so you do not have to attend a PSE program immediately in order to withdraw the funds.

 

♦ If you end up not attending school, the subscriber may be able to change the beneficiary or transfer the money to a different RESP (fees may apply, talk to your RESP provider). If there is no one it can be transferred to, the contributions made to the account can be taken out without penalty and government contributions will be lost. Any earnings made on the investment (i.e., interest) may be transferred to an RRSP or withdrawn with a 20% penalty (some restrictions apply). 

Who has control over RESP withdrawals?

 

♦ The subscriber must request RESP withdrawals, as the account is under their name and they have control over it. Talk to your RESP provider for details about the process.

 

♦ The subscriber has the ability to withdraw funds as they choose, so have a conversation with the subscriber about how the funds will best suit your needs and figure out a plan that best fits your individual circumstances.

 

◊ Remember that all Educational Assistance Payments (EAPs) must be withdrawn while you, as the beneficiary, are eligible to receive them as a student.

RESPs and taxes


♦ When money (including grants and interest) is in an RESP, it is not taxed.

 

♦ When money begins to be withdrawn, the student beneficiary will receive a T4A slip for income tax purposes which includes all the Educational Assistance Payments (EAPs) they withdrew that year (including interest and government grants).

 

♦ Due to the generally low income of students and tax credits you may not have to pay any income tax (learn more about income tax here).

 

♦ However, in some cases it may be beneficial to limit EAP withdrawals in the year(s) when you are making a higher income.

Learn more about RESPs


The rules surrounding RESPs can be confusing and can lead to difficulties in getting maximum grant money, withdrawing funds, and more. Here are some additional resources for you and your parents:

 

♦ The family member section of Financing Post-Secondary Education (for parents and other family members)

 

The RESP Book by Mike Holman

 

♦ This free podcast with Mike Holman

 

Saving for School by Gail Vaz-Oxlade

 

Money Smarts and GetSmarterAboutMoney both have information on RESP rules.

Other ways to save for your education


An RESP plan should be your first choice to save for your education as long as you are eligible for grants and incentives from the government. If you are looking for an alternative way to save additional money for education, learn more about the other types of savings accounts described above (e.g., TFSAs).

After graduation: Should I focus on paying off my debt or growing my savings?


♦ It depends on your personal circumstances. Here are some factors you should consider:

 

◊ What is the interest rate on your debt?

 

◊ What is the interest rate on your savings?

 

◊ Do you have an emergency fund for unexpected costs?

 

◊ Are you at a low or high income bracket? (important for deciding to invest in RRSPs, which will give you a tax break)

 

◊ Are you putting yourself at risk of having to withdraw money from your RRSPs before retirement?

 

◊ Financial Post (2014): Should you raid your RRSP to pay debt?

 

◊ What is your expected income in the near future?

 

♦ Here are some articles that may help you in making the right choice for you:

 

◊ Globe and Mail (2014): Pay down debt, or save for retirement?

 

◊ CBC (2013): Gen Y too busy paying off debts to save for retirement

 

◊ Financial Post (2013): Pay off student debt or invest?