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Life isn't about finding yourself. Life is about Creating Yourself - George Bernard Shaw

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Step 5 TFSA or RRSP The Big Debate

Should you put your money into a TFSA or RRSP? That is the great debate. For my money, it all depends what your plan is. I know, it sounds like a cop-out, but in fact, it is the truth.

Understanding TFSAs

Let’s look at TFSAs. For an exhaustive look at TFSAs, you should go to the Government of Canada CRA site, Tax-Free Savings Account (TFSA), Guide for Individuals. But for now, suffice it to say that a TFSA is a vehicle for a Canadian 18 years of age or older to put money in a variety of instruments, and any money made by these instruments (capital gains) will not be taxed. You need a valid social insurance number (SIN) to open this type of account.

You can have as many accounts as you like as long as you do not contribute more than your total contribution room. The program started in 2009, and based on this date, you can determine what your contribution limit is.

The annual TFSA dollar limit for the following year(s):

  • 2009 to 2012: $5,000
  • 2013 and 2014: $5,500
  • 2015: $10,000
  • 2016 to 2018: $5,500
  • 2019 to 2021: $6,000

The maximum contribution room is $75,500.

You can invest and withdraw money any time you like. The only rules are don’t over-contribute, and any principal you withdraw can be replaced but not till the following year.

You can put your money in the following investments:

  • cash
  • mutual funds
  • securities listed on a designated stock exchange
  • guaranteed investment certificates (GICs)
  • bonds
  • certain shares of small business corporations

You cannot deduct any contributions or losses on your income tax. But the good part is that what you invest and earn in your TFSA does not count toward your income or penalize your ability to qualify for:

  • old age security (OAS) benefits;
  • the guaranteed income supplement (GIS);
  • employment insurance (EI) benefits;
  • Canada child benefit (CCB);
  • the Canada workers benefit (CWB);
  • the goods and services tax/harmonized sales tax (GST/HST) credit; or
  • the age amount

Understanding RRSPs

Now let’s look at RRSPs. Once again you can find an exhaustive explanation in the CRA Government of Canada site, Registered Retirement Savings Plan (RRSP).

A RRSP is a registered retirement savings plan that allows you to hold a variety of investments in accounts to help you save money for your retirement. You can see RRSP and other registered plans for retirement at the Government of Canada website. They were originally started in 1957.

The synopsis is as follows: You can contribute till you are 71 and it is based on “earned income.” The contribution maximum for 2020 is 18% of earned income. Contribution amounts can be carried forward from year to year if not used. You can check to see what your contribution room is based on your last year’s Notice of Assessment.

These are the annual contribution limits:

2022

$29,210

2021

$27,830

2020

$27,230

2019

$26,500

2018

$26,230

2017

$26,010

2016

$25,370

2015

$24,930

2014

$24,270

2013

$23,820

2012

$22,970

2011

$22,450

2010

$22,000

2009

$21,000

2008

$20,000

2007

$19,000

2006

$18,000

2005

$16,500

 

These are some of the investments you can hold in your plan:

  • cash (money)
  • guaranteed investment certificates (GICs)
  • exchange-traded funds (ETFs)
  • mutual funds
  • real estate investment trusts (REITs)
  • bonds (both corporate and government-issued)
  • stocks (securities) that are listed on a designated exchange

Why would you start a RRSP?

The biggest reason to contribute to your registered retirement savings plan is to gain tax credits equal to the amount of money you put in. In other words, the money contribute is subtracted from your total taxable income. Your tax will be calculated on the lower tax bracket that you find yourself in.

For example, if your taxable income is $50,000, you would be required to pay $7353 on the first $49,020 and $1225.90 on the remaining $5980, for a total tax of $8578.90.

By contributing $6000 to your RRSP, you would only pay $7350 in a tax savings of $1228.90, and you would have $6000 in a RRSP generating income for you. These earnings are tax free till you take them out of the plan. When you retire, you can convert these savings to a monthly or yearly payment — or not. The money can stay in here till you turn 71. At that time, you need to transfer them into a registered retirement income fund (RRIF). This fund needs to have a minimum amount withdrawn yearly. The amount changes depending on your age. It varies from 5.28% to 20%.

Of course, the tax man will not be denied. If you have not retired and you take money out of your RRSP, you will be taxed immediately when you take it out and the amount varies by province. In many provinces, you will be taxed 5% on $5000 and under 20% on $5001 to $15,000, and 30% on $15,000 and over. When you are retired, you will be taxed at the marginal rate of your total income for the year.

Should you put money into a TFSA or a RRSP?

The question really should be where will you get the biggest bang for your buck?

If the money you have on hand will make a significant reduction in your tax bill, then you should invest it in your RRSP. You can take the tax savings and pay off any outstanding debt or put it into a TFSA. Of course, there is the school of thought that any money that goes into my pocket is better than in the tax man’s pocket any day.

If you have reached your RRSP contribution limit, then put it into your TFSA.

If you are going to invest your money, I would invest it through your TFSA first and then put it into your investment account.

Good luck and good investing!

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