RRSP or TFSA or Both???
Where is your Money best Invested, an RRSP a TFSA or Both?
Many times we hear our clients ask, whether a TFSA or an RRSP is the best investment choice to shelter their Savings Program, but a simple one or the other isn’t always as easy as it may seem. With the Tax Free Savings Accounts now reaching a record high deposit amount of $57,500 in 2018, What is the most attractive way to save for your future in a Tax Friendly way???
Let’s Look at the Details…
What are the benefits of an RRSP?
The original RRSP (Registered Retirement Savings Plan) program was started by the Federal Government back in 1957, when there was a need for Canadians to save some money on their own, and not solely rely on the Government Pension plans into retirement. They needed to convince Canadians that they too were responsible for their retirement years and income, and made it attractive initially by offering a Tax Deduction for anyone who was willing to invest in the new program. Fast forward to today, all working Canadians over the age of 18 are eligible to invest in an RRSP up to a maximum of 18% of their annual income, with limits. And if you do not use all of your RRSP room in one year, the unused balance can be carried forward indefinitely at this point. So no worries, if you do not have the cash on hand to contribute this year, it will carry forward and be available for you in the future. But what are the future tax obligations inside an RRSP? If you are planning to make less money in retirement than you do in your working years, than an RRSP may make sense. But do we know what the real tax rate will be into the future?
What are the Benefits of a TFSA?
The newest investment vehicle to help Canadians save for their future came into effect in 2009, and promised a Tax Friendly Investment vehicle for those over the age of 18, regardless of how much income they made, but capped contribution limits initially to $5000 per year. Fast forward to today, and through minor improvements and increases, if you have never made a deposit into your TFSA up to this point, you could actually make a total deposit of $57,500 in 2018. And this is why TFSA’s are now gaining so much attention, in relation to their big brother the RRSP. Although you do not get a Tax Deduction when you invest in your TFSA, the money grows completely tax free, and any withdrawals you make in the future are also free from tax, which make this a very attractive source of income into retirement. By using the funds from your TFSA instead of your RRSP in retirement, you are able to maximize the government benefits available through CPP and OAS, that may have been reduced if you were to only have an RRSP or RRIF to rely upon.
Here are the big Differences between an RRSP and a TFSA
|The Nuts and Bolts||RRSP||TFSA|
|Maximum Contributions||18% of your annual income up to a maximum of $26,230 in 2018||$5500 per year, increasing every 3 years, 2018 maximum contribution is $57,500|
|Tax Status on Deposits||Your Taxable Income is reduced by the amount you contribute to your RRSP||There are no immediate Tax Advantages when you deposit into your TFSA|
|Tax Status on Withdrawals||When you receive money from your RRSP, it is treated and taxed as income in that year, at your appropriate tax level.||There is no tax due upon withdrawal of your TFSA assets, not on the growth nor on the withdrawal|
|Investment Choices||Virtually Hundreds of investment options are available inside your RRSP, even including your mortgage||Virtually Hundreds of investment options are available inside your TFSA|
|Creditor Proof||Yes, when invested in a Segregated Fund with a named beneficiary.||Yes, when invested in a Segregated Fund with a named beneficiary.|
|Maximum Age to make Contributions||Age of 71 is the last year you can contribute into an RRSP||There is no current age limit to investing in a TFSA|
Now Let’s see how the Numbers Stack up…
Let’s look at an Example, and you can make up your own mind…
1 Time Deposit Amount $10,000
Annual Rate of Return is 7%
Withdraw full amount at age 71
Combined Tax Federal and Provincial (Ontario)
|Client Profile||Tax Refund from an RRSP upon Deposit||Tax Refund from a TFSA upon Deposit||Account Value at age 71||Tax Due on an RRSP Full Withdrawal using same tax rate as Contribution||Tax Due on a TFSA Full Withdrawal using same tax rate as Contribution||TFSA Advantage|
Annual Income $70,000
Annual Income $120,000
Annual Income $60,000
How are you Preparing for your Retirement, and who is there to Help?
Traditionally Canadians have used RRSP’s as the cornerstone of retirement planning, but as the rules change, are you currently modifying your plans to give you the best retirement options?
To be Fair, we used the same tax rates today as we have calculated into the future, as history has shown us, there are no guarantees as to what your future tax rates could be???
Take some time to see if your RRSP or a TFSA accounts are serving you, or not…
I know it is hard to find good advice these days, either you are doing all the research yourself, or even worse, you are not getting any complimentary advice at all. I have spent the last 15 years in this business, and make it my mission to help as many families in Burlington as I can. Why not just give me a call, and we can see if there are even a few tips and tricks I can give you to get you moving in a positive direction. I am passionate about what I do, and I would love to have you join me on this adventure…
And lastly, check out these 3 new eBooks (found below) which I have created for you, they are totally free, and contain an incredible amount of information to inspire your Financial Well-being…
Here is some Very Useful Information about being a Canadian Taxpayer for 2018
2018 info you’ll need
- RRSP dollar limit maximum: $26,230
- Last day for RRSP contribution for 2017: March 1, 2018
- DCP (Defined contribution plan [money purchase]) limit: $26,500
- DBP (Defined benefit limit): $2,944.44
- YMPE (year’s maximum pensionable earnings) for CPP contributions: $55,900
- CPP/QPP retirement pension average (as of 10/2017): $641.63 monthly/$1,134.17 annually
- PRB average (as of 10/2017): $9.92 month/$28.35 annually
- OAS (until 03/2018): $588.66/month; $7,063.92 annually
- Interest rate (as of 15/01/2018): 1.25%
- Inflation: 2.1% (as of 11/17)
- TFSA maximum contribution: $5,500
- Basic personal amount (federal): $11,809
- Canada Caregiver Credit (New for 2017): $2,150/$6,388 (see details here)
- Federal tax brackets: up to $46,605: 15%; $46,605 – $93,208: 20.5%; $93,208 – $144,489: 26%; $144,489 – $205,842: 29%; $205,842+: 33%