When you decide to invest your money, the options can seem endless.
Among the choices are usually RRSPs and TFSAs – but what’s the difference between the two? More importantly, what are the benefits of each?
What’s an RRSP?
An RRSP is a Registered Retirement Savings Plan to which you can contribute until you’re 71 years old. Here’s how you can benefit from an RRSP:
- You don’t pay tax on the money saved in an RRSP, until it’s withdrawn.
- You or your spouse/common law partner can contribute to your RRSP.
- Your RRSP contributions are not included in your income, which makes them tax-deductible.
- You only pay tax on the money you withdraw from your RRSP. If you’re retired and ready to withdraw money often, your tax rates may be lower because your earned income may be less at that time.
What’s a TFSA?
A TFSA is a Tax-Free Savings Account to which you can contribute at age 18 or older. Here’s how you can benefit from a TFSA:
- You don’t pay tax on any amounts earned in a TFSA or on money you withdraw.
- There’s no contribution deadline, which means you can contribute to a TFSA at any time. Any unused contribution room is carried forward on January 1 each year.
- If you withdraw money from a TFSA, you can add it back to your account (but you must wait until the following year to do so).
- You can put your TFSA funds towards many things, including academic courses, a down payment on a home and other large expenses.
- If you’re considering either option, let’s break down some misconceptions you might have heard.
1. RRSPs are pointless if you have to pay tax once retired.
Not necessarily. As you build your savings in an RRSP, that growth is tax sheltered until it’s withdrawn. So by the time you start withdrawing a steady amount of money from your RRSP, you’ll be retired and may no longer be receiving an earned income. That means your tax rates may be lower on withdrawals, so the money that you’ve saved for years in an RRSP can still help you live out your dream retirement.
Plus, each year you contribute to your RRSP, you can claim an income tax deduction for the amount you’ve contributed. So, while you’ll pay tax on withdrawals during retirement, you can save on your taxes in the years you contribute.
2. RRSPs and TFSAs are investments.
Not true. RRSPs and TFSAs are simply types of accounts with some tax-saving characteristics (as you’ve read about above). You can hold a variety of saving or investing products within an RRSP or TFSA.
3. RRSPs are only for retirement.
The money that you invest in an RRSP can go towards more than your retirement. Here are some other big life events that you can put your RRSP funds towards:
- Financing a home: You can borrow money from your RRSP to put towards a down payment on your first home under the government’s Home Buyers’ Plan. You don’t have to pay tax on this money, so long as you pay it back within 15 years after you take the loan.
- Saving for an education: You can borrow money from your RRSP to pay for full-time education or training for yourself or your spouse under the government’s Lifelong Learning Plan. You don’t have to pay tax on this money, so long as you pay it back over a period of 10 years.
4. Investing money with many financial companies is the easiest way to diversify.
To have a well-diversified portfolio, your money doesn’t have to be scattered across different institutions. Instead, you can invest your money with one institution and spread it across different investment options.
Keeping your assets with one institution provides your financial security advisor with a holistic view of your portfolio, which can help them determine if it’s meeting your financial goals.
5. You should only put money in an RRSP right before the annual deadline.
That’s not necessarily true. Every year, the deadline to contribute to your RRSP is March 1. However, you can contribute up to the maximum amount at any point throughout the year, which can help you save at a steady rate.
If you contribute any funds after the March 1 deadline, those contributions will result in a tax receipt for the following year. For example, if you contribute on April 1, 2018, those contributions will be on your 2018 tax receipt. However, if you contribute on February 1, 2018, (or any time before March 1, 2018), your contributions will result in a 2017 tax receipt.