Q: I will be immigrating to Canada in November with my spouse and three children, and I need advice on the investment opportunities a new immigrant can take advantage of. We have done a budget of our landing costs and have realized that we have an excess of $10,000 CAD outside the cost of living expenses for six months.
We want to begin long-term investing from day one and we have considered the following options;
- Open a TFSA and invest in index funds
- Open an RRSP and invest in index funds
- Open an RESP for our three kids
What do you think about the options above and what do you recommend? And what would appropriate investment options be for our longterm view?
A: Welcome to Canada, Olasumbo, Bonjour! All three are good long-term wealth building alternatives so you won’t make a mistake choosing either one, assuming you’re able to qualify for each.
You may have some shorter term goals or needs which may lead you to pick one strategy over another.
For example, you’re new to Canada. Do you really have a good handle on your expenses? The TFSA is probably the best cautionary approach.
If you find expenses are more than expected you can withdraw from your TFSA tax-free. After a year or two, with your expenses confirmed, you can withdraw from the TFSA and contribute to your RRSP, RESP, or mortgage, depending on your situation at the time.
Do you have RRSP contribution room? Probably not. Contribution room is based on previous year’s income as a permanent resident. If you don’t have the room you’ll have to wait a year, so again the TFSA is the best short-term strategy.
When you can contribute to an RRSP, make sure you gross up the $10,000 even if you move it from your TFSA. If your marginal tax rate is 30% then $10,000 x (1-30%) = $14,285 should be your total RRSP contribution. If you’re not going to gross up your RRSP contribution you’re likely better off sticking with the TFSA.
To help you out, here is a quick video on different ways to contribute to an RRSP.
Of course, one advantage of the RRSP over the TFSA is the First Time Home Buyers Program. With the RRSP you have almost an extra $5,000 you can use a part of a down payment for a home.
A second advantage of the RRSP is to maximize the Canadian Child Benefit. Here’s a great article illustrating families with a low income but a high effective tax rate due to CCB claw back. An RRSP contribution will reduce your net family income and increase your CCB.
Now, what about the RESP? If your children are going to pursue a post-secondary education and remain in Canada it’s a good option. The most you would want to contribute for your three children now is $7,500 because there is no past grant to catch up on. Beneficiaries must be permanent residents to earn a grant. You’re probably going to help pay for their education one way or another, so why not contribute to a Family Plan RESP and get the 20% grant? Maybe because there is only so much money to go around?
What is most important to you Olasumbo? Retirement? Start with the TFSA, then once your RRSP contribution room is built up, move everything to an RRSP. Your children’s education? Contribute enough to the RESP to get the grant each year.
They’re all good strategies and they’ll all contribute to your overall wealth, just in different ways.
Allan Norman, M.Sc., CFP, CIM, is a financial planner with Atlantis Financial Inc. firstname.lastname@example.org
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.
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