RRSPs and TFSAs: Ways to save on a budget
Canada Life - Dec 20, 2022
Matching each saving option to your specific financial situation
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, segregated funds, stocks and bonds to your registered retirement savings plan (RRSP) or tax-free savings account (TFSA). As your financial security advisor, 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 pre-authorized chequing contribution plan
A pre-authorized chequing (PAC) contribution 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.
We can also talk 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. Your financial security advisor or investment representative can help you understand how a spousal RRSP can impact your individual RRSP contributions.
Find out ways to use your RRSP or TFSA savings for more than just retirement.
Learn more about the basics of RRSPs and TFSAs.
Contact me today to figure out what saving strategy is best for you.
Ask an advisor: RRSP or TFSA?
Find out the reasons to invest in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) and why an advisor should help you decide.
Description: This animated video introduces a character named Hinata and his advisor with illustrated graphics to show the difference between an RRSP and TFSA.
Text “Ask an advisor” appears. The camera zooms out as the text lands in an outlined square. “RRSP or TFSA?” fades in below. An illustration of a vault draws on the right side of the frame.
Hinata: How do I choose between investing in an RRSP or a TFSA?
Description: Hinata sits in his advisor’s office with a cup of coffee on the desk in front of him. His advisor’s head nods to the right of the frame. A laptop is placed in between them.
Advisor: Well, first off, it depends on several things,
Description: Cut to Hinata and his advisor sitting behind her desk. She leans in and gestures towards the laptop.
Advisor: including your age, income, tax rate, the goal you’re saving for, and how long it’ll be until you need to use the money.
Description: Cut to five squares with icons and text, labelled “Age,” “Income,” “Tax rate,” “Goal” and “Time.”
Advisor: A registered retirement savings plan or RRSP is used to save for retirement.
Description: A pie graph labelled “RRSP” animates into the frame. An illustration of a Muskoka chair appears in the middle of the graph.
Advisor: When you put money into an RRSP, you get a tax receipt that can offset your income taxes.
Description: The advisor’s hand enters the frame and moves a coin into the pie graph. Cut to an illustration of a receipt. The advisor's hand brings the coin over to the receipt.
Advisor: You only pay tax on this money when you withdraw, and in retirement, you generally pay less tax than in your working years.
Description: Cut to line graph showing age from 20 to 90. The line representing income rises until retirement at age 65, then decreases gradually afterwards.
Advisor: A tax-free savings account or TFSA can be used to save for retirement
Description: A pie graph labelled “TFSA” animates into the frame. An illustration of a Muskoka chair appears in the middle of the graph.
Advisor: or any other goal.
Description: The camera zooms out to show two more pie graphs, one with an illustration of a new home, the other with an airplane.
Advisor: When you put money into a TFSA, you don’t get a tax-receipt like with an RRSP.
Description: The graph in the middle of the frame grows larger. The advisor’s hand enters and moves a coin into the pie graph.
Advisor: However, you also don’t pay tax on any increase in value in your TFSA,
Description: The hand pulls the coin out of the pie graph as the camera pans to a line graph representing savings over 15 years.
Advisor: or on money you withdraw from it at any date.
Description: An illustration of a receipt with scissors fades in as the graph drops slightly at the 15-year mark to show a withdrawal. The line graph continues to increase over another 10 years, another drop appears at 25 years, then finishes growing at 35 years.
Advisor: RRSP or TFSA or both? I can help you choose the best option for you.
Description: The camera zooms out of the laptop to return to Hinata and his advisor in her office.
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