TFSA or RRSP: It’s all about the tax
Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)? According to Alfred Roissl, a Toronto-based managing director with Desjardins Financial Security Independent Network, it’s all about the tax.
First, let’s review the main features of this tax-free registered savings account:
How much can I put into my TFSA? Starting this year, you can now contribute up to $5,500 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn’t a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It’s also worth noting that your withdrawals won’t compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.
It’s a great retirement savings tool: If you’ve successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, within your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won’t reduce your taxable income, you won’t receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP.
“By contrast,” explains Roissl. “Any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income.”
Don’t forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off.
“If you could afford to, contributing to each year’s maximums in both plans would be ideal,” advises Roissl. “Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.”
Planning your retirement Income: Apply money concepts such as time value of money; invest money wisely to earn interest and appreciate in value. Earning interest and appreciation will maintain the purchasing power of your dollar and contribute to a positive return for retirement income. Include dollar cost averaging as part of your investment strategy. Dollar cost averaging is used to minimize the overall effect of volatility in the markets. Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price. Benefit from investing early; understanding the effect compound interest plays over time can dramatically reduce the stress of catching up for retirement. Utilize these money concepts along with the tax advantage government incentives to save for your retirement.
2013 Limits: TFSA (total maximum contribution limit 25,500), RRSP (18% of earned income up to a yearly max of $23,820), Canada Pension Plan (max monthly benefit $1012.50), Old Age Security (max monthly benefit $546.07).
BCNA members, their spouses and staff are eligible to savings benefit in the group plan for both RRSPs and TFSAs.
Contact: SINDY BILLAN
The information in this article are presented for general knowledge and the content should not be relied upon as containing specific financial, investment, tax or related advice. It is recommended to consult independent professional financial advice to discuss personal circumstances before implementing any type of arrangement. Mutual funds are provided by Sindy Billan as a mutual fund representative with Investia Financial Services Inc. Other eligible products are offered through other regulatory bodies. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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