tax free savings account Archives

RRSPs and TFSAs – using your savings

January 17, 2016Robert T. Anderson

Now that you’ve watched your savings grow, you’ll eventually want or need to spend it. There are many different ways to use your savings – here are some guidelines to help you decide whether you should make a withdrawal from your RRSP or TFSA before retirement.

Withdrawals from an RRSP

If you make a withdrawal from an RRSP, this contribution room is permanently lost, and you’ll pay income RRSP and TFSA Investment Withdrawals tax at the time of withdrawal. You may pay higher taxes at this point because your annual income may be more than when you’re retired.

Generally, early withdrawals from an RRSP are discouraged because it means you’re losing the opportunity to save for retirement on a tax-deferred basis. That’s because the main purpose of an RRSP is to save for retirement. There are a few exceptions though:

1) Home Buyers’ Plan (HBP)¹

First-time home buyers can use the HBP to withdraw up to $25,000 tax free from an RRSP to put towards the purchase of an eligible property.
First-time means that in a four-year period, you didn’t live in a home that you or your current spouse or common-law partner owned.
You may be considered a first-time home buyer again in the future once the four-year period has passed.

Any amount withdrawn under the HBP must be re-contributed to the RRSP. Generally, you have up to 15 years to re-contribute your HBP withdrawal, with payments starting the second year after you withdrew funds. You can repay the entire amount at any time.

2) Lifelong Learning Plan (LLP)¹

The LLP gives you an interest-free loan from your RRSPs to finance full-time training or education for you, your spouse or common-law partner.
You can withdraw up to $10,000 per calendar year, to a total of $20,000.
If you withdraw more than the annual or total LLP limit, the excess will be included in your income for the year you exceed the LLP limit.

You have up to 10 years to re-contribute any withdrawals. Generally, 10 per cent of the withdrawal is due each year until it has been repaid in full. You can repay full amount at any time.

Withdrawals from a TFSA

If you withdraw money from a TFSA, you can add this money back to your account in the future. There’s also no obligation to re-contribute TFSA withdrawals. For this reason, it’s generally favourable to make withdrawals from a TFSA instead of your RRSP.

You can use the funds from a TFSA in a similar way to the HBP or LLP for a home down payment or education. Other common uses for a TFSA include an emergency fund, vacation, or big-ticket item.

If you do want to re-contribute your withdrawal to your account you must wait until the next calendar year to do so. For example, if you make a withdrawal in February 2016, you have to wait until January 2017 to re-contribute the amount you withdrew. If you re-contribute too soon, you’ll have to pay a one per cent tax penalty on the excess TFSA amount per month, for each month you have excess contributions.

The TFSA can essentially be used for whatever you choose. But remember – using it for retirement is also an important option. When you use a TFSA for short-term investment purposes, you lose the potential for additional tax-advantaged growth. That could mean a big difference to your savings when you’re ready to retire.

¹ HBP and LLP rules can be complex. I can provide you with more detailed information on these plans.

RRSPs and TFSAs – different ways to save

January 17, 2016Robert T. Anderson

Building savings isn’t always easy – after all, there are plenty of fun things to spend money on. But the satisfaction of watching your savings grow will likely outlast the thrill of your latest online purchase.

To maximize your savings potential, you can add guaranteed investment certificates (GICs), mutual funds, RRSP and TFSA Investments segregated funds, stocks and bonds to your registered retirement savings plan (RRSP) or tax-free savings account (TFSA). I can help you choose investment options that are best suited to your needs.

Accelerate your savings

Here are a few options you can consider to make the most of your contributions:

1. Pay yourself first with a TFSA or RRSP pre-authorized contribution plan

A pre-authorized contribution (PAC) plan helps you make regular, automatic contributions to your investments. It’s the idea of “paying yourself first” by treating regular saving like any re-occurring payment. This strategy is more effective because contributing more frequently gives you the advantage of dollar-cost averaging.¹

Talk to me about adding an option that gradually increases the amount you contribute over time. It’s like giving your investments an annual raise, which can make a big difference to your savings over time.

2. Catch up on unused RRSP contribution room with an RRSP loan

An RRSP loan can enhance your savings by allowing you to catch up on RRSP contributions. By catching up on contributions using a loan, you’re giving your investments the most available time to grow., It helps you now and in the future because it:

Gives you more money earlier to grow your investment.
Potentially creates a larger nest egg down the road.
Reduces this year’s tax bill through an income deduction equal to the amount of your allowable RRSP contribution.

Borrowing your RRSP contribution doesn’t have to be expensive and you can use any tax refund to help pay down your RRSP loan. This means you’re benefitting from tax advantages right away.

Despite the advantages, RRSP loans aren’t right for everyone.

3. Contribute to a spousal RRSP

In a spousal RRSP, the higher income spouse makes an RRSP contribution and claims the tax deduction but the other spouse owns the plan and the money in it. Spousal RRSPs are generally used to equalize income during retirement, reducing the overall family tax rate.

This type of plan can be an advantage if one spouse earns a lot more income than the other. Any contributions made by the higher income spouse will reduce their individual RRSP contribution room for the year, but won’t affect how much the lower income spouse can contribute to their individual RRSP.

If money is withdrawn within three years of contributing to the spousal RRSP, all or part of this amount will be taxed as income to the spouse who made the contribution. I can help you understand how a spousal RRSP can impact your individual RRSP contributions.

¹ Dollar cost averaging means investing smaller amounts at regular intervals, rather than saving up to invest in one lump sum. It can help you avoid jumping into the market at peak times by purchasing more fund units when values are low and fewer fund units when values are high.

² While borrowing to invest has many potential benefits (investing an initial lump sum creates greater potential for compound-growth compared to making smaller regular investment purchases), leveraging also has potential risks (market volatility may result in poor investment returns and the possibility of owning more on the loan than the investments are worth).

³ RRSP loan proceeds cannot be used to fund TFSA contributions.

RRSPs and TFSAs – the basics

January 17, 2016January 17, 2016Robert T. Anderson

With so many savings options available, it can be challenging to find the right fit for your needs. Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are two popular savings vehicles. Both options are government registered and provide tax-advantaged savings.

What savings vehicle will work best for you depends on a number of factors, like your age, income, tax rate RRSP and TFSA's and future cash flow needs. Understanding the differences and benefits of both options will help you make the best decision for you, now and in the future.

The registered savings benefit

When you put money into a registered or non-registered account, it’s like planting a seed to grow a tree. Income generated from investments held within a non-registered account is usually taxed every year. Gains in the value of investments held within a non-registered account are also taxable when sold. It’s like pruning the tree, slowing some of its growth.

This isn’t the case with money held within an RRSP or TFSA, and the difference can quickly add up. This characteristic of registered accounts can help your money grow faster – it’s like watering the tree. The unique tax treatment of RRSPs and TFSAs, and the benefit of compounded growth, can mean a significant difference to your investments over time. Let’s take a closer look.

Tax-advantaged growth

RRSP – Contributions to an RRSP give you an upfront tax benefit. You’ll receive a tax receipt for the contribution amount which can offset your income when filing your annual income taxes. It’s almost like paying yourself twice; you pay into your savings plan for your future and you get an immediate tax break.

Any gains in the value of the investments in an RRSP are tax deferred. You’ll only pay income tax on this money when it’s withdrawn from your RRSP at a later date. If you wait to withdraw money from your RRSP until retirement, you’ll likely pay lower taxes because your annual income may be less than when you were working.

TFSA – Unlike RRSPs, TFSAs don’t give you an upfront tax benefit. TFSA contributions are made with after-tax dollars. Any increase in the value of your TFSA is tax free. You won’t pay any taxes on money you withdraw at a later date.

Until what age can you contribute?

RRSP

No minimum age to contribute, but you must be earning income.¹
Maximum age to contribute is 71.
You must convert your RRSP into an income annuity or a registered retirement income fund (RRIF) by Dec. 31 of the year that you turn 71.

TFSA

Must be 18 or older.
Valid social insurance number required.
Must be a resident of Canada.
You can make contributions every year, regardless of age.

Annual contribution limits and deadlines

RRSP – You can contribute up to $24,930 or 18 per cent of your earned income for 2015, whichever is less. The RRSP contribution deadline for the 2015 tax year is Feb. 29, 2016. Contributions made after this date will result in a tax receipt for 2016.

TFSA – You can contribute a maximum amount of $10,000 for the 2015 tax year. There’s no deadline for contributions to a TFSA.

Unused contribution room

Did you miss a contribution opportunity in a previous year? Don’t sweat it – you can carry RRSP contribution room forward until you’re 71 and you can carry TFSA contribution room forward indefinitely. On January 1 of each year, your contribution allowance for that year resets. You can make a contribution for the new tax year, and you can catch up on unused room.²

What’s best for me?

There’s no hard and fast rule on which type of savings account is better. Both RRSPs and TFSAs are good choices for long-term savings, but there are a few key factors to consider when making a decision:

If you’ll need to withdraw money in the near future, a TFSA is better suited for meeting short-term goals.
If you’re able to maximize contributions to both account types, this generally makes more sense than putting money into a non-registered account.
If you must choose one option, consider whether your total annual income is likely to increase or decrease over time.
If you expect your income to increase, it may be a good strategy to contribute to a TFSA now, when you’re paying less income tax.
Contributing to an RRSP later when you’re earning a higher income may give you a bigger upfront tax receipt at that time.

The sooner you start contributing to an RRSP or TFSA, the greater the growth potential. Your tree has more time to grow. I can work with you to help determine an approach that suits your situation best.

¹ Earned income can be more than just your salary. For RRSP purposes, earned income is the annual total of: employment income, net rental income, net income from self employment, royalties, research grants, alimony or maintenance payments, disability payments from CPP or QPP and supplementary UIC payments. Your financial security advisor or investment representative can help you determine what this means for you.

² How much unused contribution room do you have? For RRSP’s refer to your notice of (re)assessment from Canada Revenue Agency or Revenu Québec (listed as ‘Your RRSP deduction limit’). Your current year’s limit will appear on your notice from the previous year. For TFSA’s call the Tax Information Phone Service (TIPS) at 1-800-267-6999 or online via the Canada Revenue Agency My Account feature (http://www.cra-arc.gc.ca/myaccount/).