In my original Baby Fund post a bit more than a month ago, I made the foolish assumption that most Canadians are number weirdos like me who plan everything well in advance.
"Six years of financial preparation for kids?" my much more in-tune and socially adept wife criticized. So I decided to tackle this strategy again for a shorter time frame.
This time I want to write about setting up a Spousal and Personal RRSP strategy for staying at home with the kids with only 2 years to save. Although time makes all things better—except my hairline—even two years is enough to realize a decent tax advantage with RRSP accounts.
The basics are the same. You both make $60,000 a year and decide to implement a savings plan for kid raising. Not only do you want to save money on taxes, you also want to smooth your household income so you can actually stay at home with the little treasures until they go to school.
Stereotypically assuming the female will stay at home in this Beaver family, June will contribute to her personal RRSP during the prep period and Ward will contribute to a Spousal RRSP that can be used by June after 3 years following the last contribution. Since they are planning on spending the money quickly, they should invest in no more than 50% stocks with the balance in bonds.
After 2 years of saving, June has their first child and can collect EI (maternity leave benefit). She also takes the Child Benefit payments. Two years later Baby 2 comes. In total, June is off work for 7 years and then returns part time earning $30,000 per year. Ward contributes to the Spousal RRSP up until June has Baby 1.
In year 1 of child raising, June takes EI. In years 2 and 3, June withdraws from her personal RRSP, and in the subsequent years she withdraws from the Spousal RRSP which Ward has set up in her benefit. This ensures that 3 year buffer rule is met.
During the first two savings years, June and Ward reduce their tax bill by $6,400 a year (29.65%) through contributions to RRSP accounts. June pays only $900 (5-6%) in taxes each year on RRSP withdrawals because her income is so low. This still results in a pretty significant tax savings and helps smooth out their income to reduce the shock of moving to a single-earner family.
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