In my original Baby Fund post a bit more than a month ago, I made the foolish assumption that most Canucks 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 get back into the kid thing again after spending weeks tearing apart the most hallowed topic in Canada: housing.
This time I want to write about setting up a Spousal and Personal RRSP strategy for kids with only 2 years to save. Much more reasonable my wife thinks. Although time makes all things better--except my hairline--even two years is enough to realize a decent tax advantage with RRSPs.
The basics are the same. You both make $60,000 a year, read the musing of this out-of-touch blogger, 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. They invest in a less volatile RM Balanced Portfolio, adding to bonds and taking away from stocks for a 40/10/40/10 mix that returns 5% after inflation.
After 2 years of saving, June has their first child and can collect EI. 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 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. This ensures that 3 year buffer is met.
During the first two savings years, June and Ward reduce their tax bill by $6,400 a year (29.65%) through contributing to RRSPs. 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.