It’s time to start investing in an RRSP or TFSA! Before you head out the door, it’s good to know the ABCs of savings products, your income plan, and understand the tax implications to find the right financial product for you.
Subscribe to an RRSP
You can subscribe to a Registered Retirement Savings Plan (RRSP) through a financial institution like a bank, credit union, insurance or trust company. The RRSP is a savings account registered with the Canada Revenue Agency. It allows you to accumlate savings during your working life to maintain your standard of living during retirement. Income you put into your plan is tax-free, as long as it stays in your RRSP.
Amounts invested in your RRSP are tax deductible in the allowable annual limit. This amount is adjusted annually in the Notice of Assessment from the Canada Revenue Agency, after your tax return. Unused contributions, dating back to 1991, can be carried forward, and will be including in calculating the maximum amount.
RRSP best practices and advantages:
- Reduce the amount of your long-term tax
- Start contributing as soon as possible to maximize interest
- You can borrow from your RRSP contribution to pay for a large purchase, but you do have to repay the loan back
- Once retired, you will have the option to have two incomes
- If your tax rate increases, you can ask for a reduction because of your RRSP
- Remember to think of the RAP rules, which allow you use your RRSP to finance your first home
- Think of the LLP incentive plan for continuing education to use your RRSP to finance your studies, and give your career a new direction
To subscribe to an RRSP you must be under 71 and income eligible. You can withdraw funds before you retire, but the money will then be taxable income, except in HBP or LLP. The minimum investment is $500, and the contribution limit is 18% of your income earned in the previous year.
What is a TFSA ?
Tax Free Savings Accounts (TFSA) were first created in 2009 by the government to encourage more Canadians to save money. This is of course 50 years after the RRSP was created, and the TFSA is a unique initiative that will help grow your money, while being tax-free.
Tax Free Savings Account is specially made for taxpayers who have paid up to the limit to their RRSP or retirees who no longer have access to RRSP. It is also used for people with little savings for retirement, especially women in their forties or fifties. Indeed, by contributiong to a new RRSP, these people could lose their Government pension plans for low-income.
The TFSA allows you to build capital for your projects. You can contribute up to $5,000 per year tax-free starting at the age of 18.
RRSP or TFSA?
The RRSP is a retirement preparation to meet your needs and help maintain your standing of living once retired. A TSFA will complement the benefits of the RRSP, especially if you have exceeded the contribution limit. The TSFA has interest and dividends that are not taxable upon withdrawal.
While the RRSP says you have to be retired to withdrawal it, at almost 71 years, the TSFA is free of such obligations.
To push your understanding of these savings products, make an appointment with your financial institution, and choose the best one the suits your situation.
Resources:
TSFA – Government of Canada
RRSP – Government of Canada
