Parents for a few months, Alexandre*, 28, and Antoinette*, 27, want to update their financial planning in order to optimize their newfound savings capacity after a few years of budgetary turmoil.
Posted yesterday at 6:00 a.m.
Whether it’s with the end of Alexandre’s university studies and the debts that come with it, their first years of employment under advantageous conditions in the banking sector, the financing of their first real estate purchase and the arrival of a first child: the lives of Alexandre and Antoinette, and their financial and budgetary agenda, have been anything but quiet in recent years.
Now that it’s stabilized a bit, they find that their family budget is heading towards free cash on the order of $2,000 per month. They want to optimize the use of this money in order to replenish savings assets that are still very depleted, while taking into account short- and medium-term tax considerations.
“The financing of our first house is already well established over five years, before a fixed rate of 1.79% obtained last year just before the sharp rise in rates in order to counter inflation”, indicates Antoinette to The Press.
“But going forward, we are hesitant about our next personal finance priorities. For example, we want to set up a registered education savings plan [REEE] for our child. However, is it wise at this time when our registered savings accounts [REER et CELI] with tax benefits remain very bare with large amounts of unused contributions on both sides? asks Antoinette.
“If we set up an RESP for our child, would there be tax elements to consider between my spouse and me depending on the origin of the contributions? Also, once our child’s RESP has contributed to the annual maximum, how should we prioritize contributions between our RRSPs or our TFSAs? »
Moreover, the couple is wondering about the right way to include in this financial planning the beginning, next January, of the principal repayment on Alexandre’s balance of $70,000 in student loans.
For the moment, this debt is financed at the prevailing prime rate plus 1%.
Antoinette, 27 years old
Personal financial assets:
Defined benefit pension plan: pension estimated at $84,000 (61% of projected salary) from age 65
Non-registered savings account: $15,000
Alexander, 28 years old
Personal financial assets:
Defined benefit pension plan: pension estimated at $60,700 (approximately 49% of projected salary) from age 65
Personal liabilities: student loans of $70,000 (start of repayment in January 2023)
Common non-financial asset
Family residence: approximately $500,000
Common liabilities: $435,000 mortgage loan (5-year fixed rate of 1.79%)
Main disbursements from the family budget
RRSP, TFSA and future RESP contributions: approximately $24,000 expected in 2022
The situation and the questions of Alexandre and Antoinette were submitted for analysis and advice to Julie Tremblay, who is a financial planner and financial security advisor at the offices of the firm IG Gestion de patrimoine in Quebec and Lévis.
Julie Tremblay was also a member of the board of directors of the Quebec Institute of Financial Planning (IQPF) from 2019 to 2022.
“According to their budget, young spouses have $2,000 per month in savings capacity. It’s an excellent start for updating their financial priorities,” notes Julie Tremblay.
First of all, now that they are parents, “starting contributions to an RESP for their child is an extremely advantageous means of saving-investment”, confirms Ms.me Tremblay.
“They can contribute up to $2,500 a year; an amount on which they will be able to seek subsidies from 30% of governments. When their child returns to post-secondary studies, the amount accumulated in the RESP can be withdrawn as partially taxable income. [subventions et plus-value cumulatives] on behalf of the child. For the capital, parents can choose to recover it or leave it to their child,” explains Julie Tremblay.
To set up this RESP, she recommends that Alexandre and Antoinette make a “scheduled contribution” of $208 per month right now from their savings capacity.
Secondly, with regard to the young couple’s still empty RRSPs and TFSAs, Julie Tremblay suggests a similar approach between the spouses, but with a particularity for Alexandre because of the balance of his student loan.
“For Antoinette, I recommend withdrawing her assets in a TFSA [15 000 $] and add $1,000 in cash to contribute to her RRSP maximum of $16,000 for the 2022 tax year. She will get a significant tax refund next year that she can use to bail out part of the amount withdrawn from the TFSA. »
For the rest, “since her RRSP contributions will be up to date, Antoinette will be able to continue contributing, but paying attention to her annual limit determined by the pension adjustment resulting from her participation in an employer pension plan. “, specifies Julie Tremblay.
In the case of Alexander, Mr.me Tremblay recommends that he perform “the same transaction as his spouse and use all of his $15,000 in TFSA to contribute to the RRSP”.
However, considering her high amount of unused RRSP contributions ($41,000), Julie Tremblay suggests that she increase her subsequent contributions as cash becomes available in her budget.
“The tax refund [des cotisations au REER] next year can be used again to contribute to the RRSP each year, and so on until the amount of unused contributions is exhausted,” explains Ms.me Tremblay.
Moreover, “if Alexandre and Antoinette contribute a total of $31,000 to their RRSP this year, that will generate a considerable increase in their family allowances over the next 12 months. And these increased allowances can then be used to contribute to their child’s RESP without too much budgetary effort”.
Also, underlines Julie Tremblay, Alexandre will then have to modulate his “catch-up” RRSP contributions according to the start of the minimum repayment of his student loan, at the beginning of 2023.
“The student loan must be repaid over a maximum period of 10 years. But at least the interest charges [à taux fixe ou variable] are tax deductible. »
* Although the case highlighted in this section is real, the first names used are fictitious.
Are you planning a project that requires a wise use of your money? Do you have financial problems?