A government savings plan is a registered account designed to help you save for various purposes, including retirement, education, or buying your first home. In this article, we provide an overview of the different government savings plans and how you can use them to support your financial goals.
What is a Government Savings Plan?
To help you and your family save for a variety of long-term goals, the Government of Canada has created several registered savings plans. Many of these plans offer tax advantages or government contributions. Understanding the different plans available and the benefits they offer can help you improve your personal finances.
In the following section, we explore some of the different registered plans and who can benefit from them, so you can make an informed decision about which ones are right for you.
Registered Retirement Savings Plan (RRSP)
A registered retirement savings plan (RRSP) was set up by the government of Canada and is administered by the Canada Revenue Agency (CRA). It is meant to help Canadians save for retirement. Any contributions you make to an RRSP are tax-deductible, meaning they lower the income you’re taxed on.
For instance, if you make $60,000 per year and invest $2,000 in an RRSP, you will only be taxed on $58,000. You don’t pay taxes until you withdraw your money, years down the line.
As long as your money stays in the RRSP account, your investments grow tax-deferred. This means you don’t pay taxes until you withdraw your money. Hopefully, at this time, you’re retired and in a lower tax bracket with a lower tax rate.
Each year, you can contribute up to 18% of your earned income in the previous year, up to the annual limit.
Tax-Free Savings Account (TFSA)
The tax-free savings account offers a flexible way to set money aside for short and long-term financial goals. Contributions to a TFSA are not tax-deductible. But any income earned in the account is tax-free, even when it’s withdrawn.
With a TFSA, you can withdraw your money at any time. For instance, say you want to use some of your money for a down payment on a house. You can withdraw the money, tax-free. The amount you withdraw is added back to your contribution room for the next year.
The maximum contribution limit changes from year to year. Any contribution room you don’t use in a year is carried forward to the following year.
Registered Education Savings Plan (RESP)
The registered education savings plan (RESP) is to help you save for your children’s post-secondary education. Anyone can contribute to your children’s RESP.
All contributions grow tax-free while the funds remain in the account. The government will also contribute 20%. You can receive up to $500 per year and $7,200 per child.
When your kids are going to school and it’s time to make a withdrawal, the funds will be taxed at your kids’ tax rate.
While there’s no annual limit for the RESP, the total lifetime maximum is $50,000.
Beginning April 2028, the Government of Canada will automatically open an RESP for each eligible child so they can receive the Canada Learning Bond (CLB). The CLB provides a $2,000 lifetime maximum in an RESP for children from low-income families.
First Home Savings Account (FHSA)
The first home savings account (FHSA) is one of the newer savings plans that became available to Canadians in 2023. The purpose of this plan is to help first-time home buyers save for a down payment.
Like an RRSP, contributions are tax-deductible. Similar to a TFSA, withdrawals are tax-free. The annual contribution limit for an FHSA is $8,000, and the lifetime limit is $40,000.
Pooled Registered Pension Plan (PRPP)
If you don’t have access to a retirement savings plan through your employer, or you’re self-employed, you might benefit from a pooled registered pension plan (PRPP). The PRPP is similar to a defined-contribution plan and is meant to help individuals save for retirement.
In a PRPP, you can contribute a portion of your income to the plan. Your employer can also contribute to the plan, though it’s not mandatory. The PRPP pools contributions from you and other plan members to help reduce administration costs.
Registered Disability Savings Plan (RDSP)
A registered disability savings plan is meant to help Canadians with disabilities save for the long term.
Contributions to the RDSP are not tax-deductible, but income grows tax-free until the money is withdrawn. There is no annual limit on contributions, but the overall lifetime limit is $200,000. An individual can continue making contributions up until age 59.
When you open an RDSP, you can also apply for a Canada Disability Savings Grant and Bond. This is a matching grant that is paid until the year you turn 40. This means that if you contribute to your plan, the government will also contribute up to $3,500 per year, with a lifetime limit of $70,000.
Low and modest-income individuals can also receive $1,000 per year from the government, with a lifetime maximum of $20,000 through the Canada Disability Savings Bond. You don’t need to make contributions to receive this bond.
How Can Government Savings Plans Improve My Finances?
As you can see, there are a variety of ways to contribute to government savings plans that can improve your finances. Tax-advantaged plans, like the RRSP and the TFSA, allow for tax savings and tax-free or tax-deferred growth. This can help your money grow faster.
If you’re able to use multiple accounts together, say the RRSP and TFSA, you can boost your savings.
Unfortunately, life can be unpredictable, and when in debt, you may have to draw on these savings sooner than intended. However, knowing how government savings plans can benefit you, can help you make smarter financial decisions.
Need Debt Help? Talk to a Licensed Insolvency Trustee
If you want to start putting money into a government savings plan but don’t have room in your budget due to debt, speak to a Licensed Insolvency Trustee (LIT). A LIT can assess your finances and help you create a plan to get out of debt, allowing you to make progress towards your short and long-term financial goals.
For a free, no-obligation consultation, contact Allan Marshall & Associates at 1-888-371-8900 or complete our online contact form. If you have debt problems, we can help.
