As we go through various life stages, what’s most important to us changes and our financial needs evolve. In our early years, we focus on building a solid foundation through education. During our earning years, family, careers and housing are important. As we approach retirement, maintaining lifestyle, travel and healthcare are priorities. Everyone needs to plan their finances to achieve these goals. Fortunately, the Government of Canada has provided investment accounts to help. It’s a challenge to know which savings option to choose – a Tax-free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP).
RRSP
Save money for your retirement while lowering your income tax. Contributions are deducted from your annual income to reduce the amount of income tax you must pay each year. Tax is deferred until funds are withdrawn.
TFSA
This flexible, general-purpose savings vehicle allows Canadians to earn tax-free investment income. Any amount contributed, as well as any income earned in the account (interest, dividends and capital gains) is generally tax-free, even when it is withdrawn. Contributions to the plan are not tax-deductible.
Retirement savings
A major factor when deciding between an RRSP or TFSA for retirement savings is your tax rate at the time of contributing compared to the time of withdrawing. It is important to determine whether it is more favorable to pay taxes now or later.
- Invest in an RRSP if your marginal tax rate is greater while employed versus your pension income. The tax rebate received by deducting the RRSP contribution from your taxable income will be greater than the income tax owing when withdrawn.
- Invest in a TFSA if your marginal tax rate is less while being employed versus your pension income. The TFSA will be advantageous if this is your scenario as TFSA withdrawals are not reportable on your income tax return and therefore taxes owing will not be at the increased marginal tax rate.
- Invest in either RRSP or TFSA if your marginal tax rate will be the same while employed versus retirement. The tax rebate received by deducting the RRSP contribution from your taxable income will be equal to the income tax owing when withdrawn.
Buying your first home
When planning your savings strategy to purchase your first home, the Government of Canada allows you to withdraw up to $35,000 under the Home Buyers’ Plan from your RRSP. There is no income tax implication as long as the amount is repaid back into the RRSP within 15 years.
The TFSA will allow monies to be saved within the contribution limits, invested tax free and removed without impacting taxable income. The withdrawal amount can be recontributed into the TFSA the following calendar year.
Post-secondary education
If you want to pursue education later in life and attend a full-time qualifying program, the Government of Canada allows you to withdraw up to $10,000 per calendar year ($20,000 in total each time you participate) from an RRSP to fund your own or your spouse’s education under the Lifelong Learning Plan. There is no income tax implication as long as the amount borrowed is repaid back into the RRSP within 10 years.
The TFSA allows for savings within the contribution limits, invested tax free and removed without impacting taxable income. The amount withdrawn can be used to pay for your own education or can be gifted to a spouse or child (to supplement any savings from the Registered Educational Savings Plan). The withdrawal amount can be recontributed back into the TFSA the following calendar year.
Canadians have many investment account options to help with saving. Careful consideration of the features and benefits of these strategies, and your personal tax situation and income tax calculations, will help in achieving your financial goals.
FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management, including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit www.firstontario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.