Where should my savings go: an RRSP or a TFSA?
As we begin the year with renewed focus, now is the perfect opportunity to kick-start your tax and retirement savings. Maximize your Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP), and take advantage of your new 2018 contribution room. To ensure you get things started on the right path, we have some great tips and strategies to help you optimize your contributions.
The 2019 TFSA contribution limit is $6,000 and available from January 1, 2019.
The 2018 RRSP contribution deadline was March 1, 2019.
What’s the difference between an RRSP and a TFSA?
|RRSP ||TFSA |
|Contributions are tax deductible. ||Contributions are not tax-deductible. |
|Contributions may lead to a tax refund. ||No tax refund on contributions. |
|Investments grow tax deferred. ||Investments grow tax free. |
|Withdrawals are taxable. ||Withdrawals are tax free. |
|Withdrawals do not create new contribution room, room is lost. ||Withdrawals create new contribution room in the following year. |
|Required conversion to a RRIF at age 71, minimum RRIF withdrawals at age 72. ||No maturity date, no required withdrawals. |
|Contributions are no longer permitted for individuals older than age 71. ||No maximum age, contributions permitted over lifetime of the individual. |
Six tips for getting the most from your RRSP and TFSA contributions:
- Optimize your contribution amount - To receive the greatest tax savings, examine your tax bracket to determine the optimum amount to contribute. Every dollar contributed to your RRSP is deductible from your taxable income and the taxes are refunded. For example: in Ontario, if you earned $100,000 of income, every dollar earned after $91,831 is taxed at the marginal rate of 43.41%. If you contribute $5,000 to your RRSP, you would receive a refund of $2,170.50 or 43.41% of the amount contributed. Your taxable income decreases as your contributions increase, this can lower your bracket and the amount of tax refunded on the next dollar contributed. Contact your Richardson GMP Advisor to receive our quick reference Financial Planning Rates and Amounts specific to your province of residence.
- Contribute to a Spousal RRSP - If you are married, or in a common-law relationship, consider making an RRSP contribution for your lower income spouse. While current rules allow individuals age 65 or older to split up to 50% of RRIF income with their spouse, better income splitting at retirement can be achieved through a spousal RRSP contribution as 100% of the income is shifted to the lower income spouse.
- Top up your TFSA from unused contribution room - A TFSA almost always makes sense if you have excess income or savings. One simple strategy is to convert an existing part of your non-registered portfolio to a TFSA. While TFSA contributions can be made in-kind, investments with a capital gain will be triggered resulting in a tax liability, and those investments transferred with a loss, will result in the capital loss being denied. For those considering this strategy, it’s important to work with your trusted advisor so as not to unintentionally trigger capital gains or forego eligible capital losses.
- Gift funds to your spouse for their TFSA contribution - If you have a spouse with unused TFSA room, consider gifting funds for the purpose of maximizing their TFSA contribution. Doing so will not give rise to income attribution provided the funds remain invested inside the TFSA.
- Borrow from your RRSP for your first home or a school program - If you have already been diligently saving to your RRSP, and need access to these funds prior to retirement, there are programs available such as: The Home Buyer’s Plan (HBP), if you’re buying a home, and the Lifelong Learning Plan (LLP), if you’re going back to school. Each program allows you to borrow funds from your RRSP tax-free, subject to later repayment. HBP and LLP repayments are 1/15 and 1/10 of the amount borrowed for the respective plan.
- Make the RRSP contribution today but defer the tax deduction - It is possible to contribute to your RRSP without claiming the tax deduction immediately. This strategy is beneficial if you are in a low tax bracket now but you want to take advantage of the tax deferred growth within the RRSP. You can claim the deduction later when you may be in a higher tax bracket.
There’s never a better time to start saving than now. Start your 2019 on the right track by taking advantage of the new room created in your TFSA and RRSP. As always, your Richardson GMP Advisor is here to take the guess work out of saving and assist you in making the right investment choice.
Interested in reading the full article?
Contact us for our Tax and Estate Planning education article: Where should my savings go? RRSP or TFSA for 3 unique Canadian situations. Also, contact us to get a copy of our helpful guides on RRSPs, TFSAs and Financial Planning Rates and Amounts.
Like many Canadians, if you have a student, mortgage or other type of debt, the question of saving to a TFSA or RRSP is often balanced by the option to repay debt early. Although debt repayment is considered a risk-free return and a safe choice, there are significant advantages to diversification, liquidity and a long investment time horizon. When weighing the option to pay down debt or invest, consider the following in your decision:
- The potential return on investment compared to the interest rate (return) on your debt.
- Paying down mortgage debt concentrates your wealth in your home and your investments potentially are less diversified.
- Repaying low interest debts such as student loans could result in re-borrowing at a higher interest rate if you need access to funds later on.
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