Financial Focus: RRSPs vs. TFSAs
By Medicine Hat News on September 15, 2018.
What is an RRSP? A Registered Retirement Savings Plan (RRSP) is an account designed to help Canadians plan for their future. Your RRSP is an investment portfolio, meaning it can hold a variety of investments like mutual funds, ETFs, guaranteed investment certificates (GICs), bonds and stocks. Essentially, by “registering” your retirement savings plan you’re entering into a contract with the government: you put money away for retirement and they provide some perks. And those perks are what make RRSPs special. What’s in it for me? Anything you contribute to your RRSP is not taxed until you withdraw funds at retirement, which means more money down the road. Say you make $50,000 this year and put $5,000 of that in your RRSP account. This contribution can be deducted directly from your income so that only $45,000 is considered taxable by the government. Another benefit is that any investment gains you make within the RRSP are able to grow tax-deferred until you withdraw money from the account. When interest and earnings on investments are not taxed, you gain more, leading to more money for you to spend in retirement. When you do begin to withdraw money from your RRSP, you’ll most likely be retired and earning much less than when you were working, and will therefore be in a lower tax bracket. The details: Since an RRSP is a registered plan, there are rules around how much you can invest and for how long. First, you can contribute to your RRSP until Dec. 31 of the year you turn 71, then you have to convert it to another vehicle, such as a Registered Retirement Income Fund (RRIF). Second, there is a maximum you can contribute. The amount changes from year to year. For 2018, the total amount that can be contributed is the lesser of $26,230 or 18 per cent of your earned income the previous tax year (plus any unused RRSP deductions from previous years). In 2019, the limit will be bumped to $26,500. What is a TFSA? The Tax-Free Savings Account (TFSA) was introduced in 2009 to encourage people to save for retirement. You’re eligible to start contributing as soon as you turn 18. What’s in it for me? This account can hold a basket of investment products — GICs, mutual funds, ETFs, stocks, bonds, etc., and even though the money you put into your TFSA is ‘after-tax income,’ the gains you make from the investments inside are tax free. There’s good news on the withdrawal side too. You can withdraw money from your TFSA at any time and withdrawals are not taxed as income. The details: Maximum annual contributions can change each year, so for 2018 you can put in up to $5,500, but check back next year to keep on top of the limits. Any unused contribution room can be carried forward to future years, and if you do decide to withdraw money, the withdrawal amount is added back to how much you can contribute the next year. The fact that the money you take out of your TFSA isn’t considered income is even more important for retirees. Why does this matter? It means you can take money out without it affecting other benefits (like Old Age Security) that are based on income. To understand which account type is better for you as far as where to build your wealth give us a call to discuss further. A. Craig Elder, CFP, FMA, CIM, FSCI is Branch Manager with RBC Wealth Management Dominion Securities Inc. in Medicine Hat. Source material provided by RBC Wealth Management Services. Advisors are insurance licensed under RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities and is part of the RBC Financial Group, member CIPF. For more information on this and other financial strategies, contact an RBC Dominion Securities Advisor at 403-504-2700. 15-14
