If you’re over the age of 18 and working, the RRSP and TFSA are going to be pivotal tools for you to build financial security for your future.
The key is to get the money within these plans invested well, and at a low cost, and have this money grow long-term for retirement.
So, it’s not enough to just pile money away into either plan; you need to get it working for you through savvy investing.
If you’re relatively new to investing or retirement planning, here’s what you need to know about both plans.
The RRSP and TFSA are tax advantaged
With the RRSP, you save taxes today and pay them later on in retirement, hopefully at a lower tax bracket than you’re currently at.
With the TFSA, you save taxes in the future by investing with after-tax dollars today. So, in retirement, money taken from your TFSA will be tax free.
With the RRSP, you’re allowed to contribute 18 per cent of your annual income, up to a maximum of $ 27,830 for the 2021 taxation year. With the TFSA, you’re allowed to contribute $ 6,000 in 2021, regardless of your income.
With both plans, if you don’t use the available room, you simply carry it forward, which is a nice option in the event you can’t afford to make contributions one year, but have the flexibility to play catch-up the following year or two, for example.
The most trusted source to see exactly your available room in both plans is through CRA My Account. Log in through the CRA’s secure portal and you will see the allowable balance for both of your plans located there.
Should one plan be prioritized over the other?
The ideal situation is to contribute to both, maxing out your contributions annually. But, let’s face it. That can take time, and if you’re making a lower income or tackling expensive consumer debt, it might not make sense to focus on your RRSP just yet.
The general guidance I like to give my students and clients is this: If you make more than $ 55,000 in a given year, the RRSP is going to be a stronger tool for you in terms of tax savings. The reverse is true if you make less than that. In that case, I recommend you focus on the TFSA first, and then your RRSP as a secondary tool.
Everyone’s tax situation is different and that’s where having an accountant or a financial adviser on your financial dream team can come in handy. They’ll be able to crunch the numbers for you as to which plan will be most tax advantageous for you considering your total financial situation.
Many people strike a balance between contributing to both accounts in an effort to ensure they take advantage of both accounts and their respective tax advantages.
Here’s how to get started with these plans
All major financial institutions in Canada can help you set up an RRSP and TFSA as long as you have the correct identification. Some Canadians choose to go with their primary bank. Others work directly with a wealth management firm. Still others choose DIY solutions or hire a robo-advisor to handle their accounts. The best fit is going to come down to where you’re most comfortable, where the fees are lowest and where the best long-term performance is happening.
Before you just sign up somewhere, do some research, ask around and get recommendations.
In many cases, but not all, you’ll need to build the balance up to at least $ 1,000 before the funds can be invested in the market.
When you’re ready, automate your contributions
Automation allows you to “outsmart” your forgetful self by moving money directly into your RRSP and TFSA regularly. Most people choose payday for this, but take a look at your cash flow to see when it’s the best time for you to contribute. Typically, you need to add a minimum of $ 25-50 per contribution. Over time, and hopefully as you earn more, you can contribute more to these plans. But something is better than nothing. Go at an appropriate pace for you.
What about investing outside of these plans?
This will definitely make sense if you have contributed the maximum amounts you can to both the RRSP and TFSA, or if there are other limitations or cautions around whether you can or should open either (an example could be your citizenship). However, if there are no special and factual considerations, the RRSP and TFSA are probably going to be your best friends when getting prepared for retirement. Once they’re fully funded, then move on to nonregistered investments.
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