Opening your first RRSP or TFSA?

December 19, 2019

Terms like RRSP and TFSA are tossed around so much, you might feel you’re the only one who doesn’t know exactly what they are and what they’re for. This short article will help you with the basics — just enough to give you the confidence you need to get started!

  1. What’s the big deal with RRSPs and TFSAs?

Imagine earning money but not paying income tax on it. Or buying something but not paying sales tax. With registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), you don’t have to pay tax on your investment earnings — and with an RRSP you even get a tax deduction when you contribute. The federal government offers these savings to help people save money, especially for retirement.

  1. Can anybody open an RRSP or a TFSA account?

Anyone who has a social insurance number (SIN) and files an income tax return in Canada can open an RRSP account and contribute to it, as long as they earned income in a previous year and have RRSP contribution room available to them.

Anyone who has a valid SIN and is 18 or older can open a TFSA account. You don’t need to earn income to contribute, but you can contribute only up to your TFSA limit for the year.

  1. What do you use an RRSP or a TFSA for?

RRSP: You save money in this type of account for your retirement. It potentially grows faster because you don’t have to pay tax on the investment earnings. When you withdraw money from the account in the future (generally during retirement), the money counts as income and you pay tax on it.

There are also ways to withdraw money from your RRSP before you retire without including the withdrawals in your income. You can withdraw up to $35,000 under the Home Buyers’ Plan to help you buy your first home. Or if you want to go back to school, you can withdraw up to $20,000 under the Lifelong Learning Plan. Any amounts you withdraw under these programs must be repaid in the future.

TFSA: You can use this account to save for short-term goals, like a vacation, or medium-term goals, like a home renovation. But the real power of the TFSA is for long-term goals, such as retirement. A TFSA lets your money grow faster because you don’t have to pay tax on any investment earnings.  

  1. How are RRSPs and TFSAs different?

RRSP: When you contribute to an RRSP, you get to deduct that amount from the income you report on your tax return that year. This means you reduce the income tax you pay. It could even help you receive a nice refund. However, there’s no free lunch, so you will have to pay tax on those funds eventually: when you withdraw funds from the RRSP, this counts as income that you have to pay tax on. That’s why most people leave the money in their RRSP until they’re retired and they’re in a lower tax bracket. If you do that, you’re likely to save on tax in the long run. 

TFSA: Unlike with an RRSP, you don’t get to deduct TFSA contributions on your tax return, so the deposit is essentially made with after-tax dollars. However, withdrawals from a TFSA are not included in your taxable income. For this reason, people feel freer to make withdrawals from a TFSA at any point.

  1. What can you invest in with an RRSP or a TFSA?

You can invest in a wide variety of things: mutual funds, portfolio funds, exchange-traded funds (ETFs), stocks, bonds and guaranteed investment certificates (GICs).

  1. How much can you contribute to an RRSP or a TFSA?

The easiest way to find out exactly how much you can contribute is through using the Canada Revenue Agency’s online “My Account” service. It’s a great idea to sign up if you haven’t already. You can also get this information by phoning the Canada Revenue Agency. Your annual RRSP contribution limit is also printed on your notice of assessment for your prior year’s income tax return.

RRSP: In general, it’s 18% of your previous year’s earned income plus any unused contribution room from previous years, minus an adjustment for any contributions you made to a registered pension plan through work, up to a maximum of $26,500 for the 2019 tax year (it’s $27,230 for 2020).

TFSA: The maximum amount is set each year by the government. For 2019 and 2020, you can contribute a maximum of $6,000. But if you’ve never contributed, you have lots of cumulative room. As a resident of Canada, your contribution room has been accumulating since 2009 for every year that you were 18 or older.

Table shows the TFSA annual limit and TFSA cumulative amounts from 2009 to 2020

  1. When is the deadline?

RRSP: For the 2019 year, the deadline for your RRSP contribution is Monday, March 2, 2020. If you miss the deadline, you can’t use the contribution to deduct from your income on your 2019 tax return — but you can use it for the following year.

TFSA: There is no deadline for TFSA contributions. You just get more TFSA contribution room every year.

Thoughtful planning and advice from MD Financial Management can help you save more and rest easier. Contact an MD Advisor* today to make the most of your RRSP contribution.

 

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

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