It’s normal to have questions about the best savings vehicles for you. To determine which one is best for you, it is important to ask yourself one question: “What am I saving for? Short- and medium-term projects or long-term projects?” Depending on how you answer this question, you will be able to move toward an RRSP, a TFSA or another type of investment account. While March 1st was the end of the contribution period for 2018, March 2nd was the start of the contribution period for 2019!
If you’re thinking about retirement and/or your current income is higher than it will be when you retire, an RRSP can be a good vehicle for you. It provides a tax deduction and possibly a tax refund or a tax decrease in the investment year.
For young families, this can be an interesting option because many of our social programs are based on taxable income. And reduced taxable income for a family with children can mean more in family allowances, lower subsidized daycare contributions or any other tax incentive based on taxable income.
An RRSP also enables you to contribute up to 18% of the income earned in the previous year (or the ceiling established for the year in question) and accumulate unused contribution room from year to year. Also, the return yielded within the RRSP is tax-free. When withdrawing your RRSP, you will have to pay tax; however, if you are retired, this will be your main source of income, so the payment will be lower.
Do you need money from your RRSP because you’re going back to school or buying your first home? Thanks to the procedures established by tax authorities, you will have the option during the life of the RRSP to withdraw money without negative tax impacts (HBP). Eligibility and withdrawal requirements apply.
A TFSA could be a good investment for short- or medium-term projects like a trip, renovations, a wedding or the purchase of a new car. The return is tax-free and withdrawals from a TFSA are non-taxable. Additionally, when you withdraw money from your TFSA, your taxable income does not increase and you recover the contribution room (the next year). You can also use the TFSA to invest for retirement if you have reached your RRSP’s contribution limit. The contribution limit for 2019 is $6,000 plus any accumulated unused contribution room (18 years of age).
The key disadvantage of the TFSA is the effort to save. To invest $1,000 in a TFSA, you will have to invest $1,000 whereas with the RRSP, your investment will be lower thanks to a tax refund or any tax relief this contribution provides.
An RRSP and/or a TFSA provide significant tax benefits while also each having its respective disadvantages.
The important thing in terms of savings is to start early and develop the reflex to save as the years go by. Opting for systematic preauthorized withdrawals every week, bi-weekly or monthly will help you save more. This is a systematic approach that helps you begin investing early and regularly without having to worry about stock market fluctuations.
Don’t know where to start? Work with a financial advisor. This is someone who can help you based on your reality and your needs.