Save now and enjoy later: the ins and outs of an RRSP and a TFSA ~Elizabeth O’Connor of RBC

In my last article, Add writing a financial plan to your list of New Year’s resolutions, we visited the importance of understanding your financial situation; knowing exactly what is coming in from all particular sources and then knowing where it is all allocated. Debits and credits, assets and liabilities, expenses and incomes, financial goals and dreams all play a part in our budgeting and mapping out our Financial Plan. Now that we are on the positive side of the ledger it is time to consider the various financial vehicles available to enhance and grow our hard earned savings.

The two most widely used vehicles are the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Accounts (TFSA). Both shelter funds from tax for as long as the investments are held within the plan/account. Both may contain stocks, bonds, mutual funds, Exchange Traded Funds, GICs and cash. Both also allow for unused contribution room to carry forward so owners have the option of “catching up” in later years, but be careful not to over contribute as the Canada Revenue Agency charges a penalty on excess contributions to your RRSP and TFSA.

The RRSP deadline for the 2016 tax year is March 1, 2017. Your 2016 contribution limit is 18% of your 2015 earned income to a maximum of $25,370. Contributions to your employer’s pension plan reduce the amount you can put in to the RRSP. The exact amount an individual may contribute for 2016 will be found on the RRSP Deduction Limit Statement section of your 2015 Notice of Assessment. Contributions to your RRSPs are tax deductible and tax sheltered until such time as you start withdrawing from the plan.

You can contribute to your RRSP as long as you have room and it is before age 71. Your RRSP must convert to a Registered Retirement Income Fund (RRIF) no later than the end of the year you turn 71. Presumably you will be in a lower tax bracket than when you were working so the tax you pay on your RRIF should be less than it would have been had you not put it into an RRSP to begin with.

It can be rather costly to remove funds from the RRSP while you are still working, as the amount is taxed as income at your highest marginal tax rate and the amount taken out cannot be replaced at any point. You can borrow from your RRSP under the Home Buyers Plan and LifeLong Learning Plans. I would suggest contacting CRA to find out the criteria for qualifying and any other information pertaining to either of these options.

Contributions to a Tax Free Savings Account are made with income that has already been taxed and so are not tax deductible. The beauty of the TFSA is that the money will never be taxed again nor, will any growth, interest or dividends earned within the account. Funds coming out of a TFSA are simply not taxed. The TFSA was introduced to Canadians in 2009 so if you were over 18 years of age in that year and have never contributed to a TFSA before, you could open one today and deposit $52,000. Remember your TSFA allows for unused contributions to be carried forward. A TFSA also allows the owner to replace any funds taken out in a given calendar year, the following year.

In a perfect world you would fully contribute to both. As this is not always a viable option, the question in deciding which to contribute to, your RSP or your TFSA, might come down to – should you pay taxes now or later? This depends on your current marginal tax rate and may warrant a conversation with an accountant. The answer could be contribute 100% to your RRSP or contribute 100% to your TFSA. Perhaps contributing a certain percentage to each works best for your situation? The solution could be a process of contributing to your RRSP, obtaining your tax refund and using those funds to contribute to your TFSA. There are many routes you could take and the options for making the contributions are numerous, no matter what your pay schedule or banking habits.

Essentially both an RRSP and a TSFA are plans aimed at saving your money. Remember the wonderful principle of delayed gratification our parents tried to instil and how it got trampled by the, ‘I want it and, I want it right now’ excesses of the ‘me generation’? When it comes to a happy, healthy and long retirement our parents had it right. Save now and enjoy later.

May all of us retire healthy, wealthy and wise!

This article is supplied by Elizabeth O’Connor, an Investment Advisor with RBC Dominion Securities Inc. (Member–Canadian Investor Protection Fund). This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.

This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. ©2016 RBC Dominion Securities Inc. All rights reserved.

Elizabeth O’Connor can be reached at 705-789-2100 or [email protected].

Whether you are looking for a full time, full service financial advisor or seeking expert financial advice as a second opinion, call Elizabeth. With offices in Haliburton, Huntsville and Bracebridge, Elizabeth works closely with clients in cottage country from the lakes and surrounding towns.

Elizabeth O’Connor is an Investment Advisor with RBC Dominion Securities, which is a member of the Canadian Investor Protection Fund. 705-789-2100