RRSP or TFSA?

Suman — Sun, 27 Jun 2021 23:55:17 +0000

Both registered retirement savings plan (RRSP) and tax-free savings accounts (TFSAs) offer a significant range of benefits when it comes to saving for retirement.

TFSAs :

TFSAs are registered accounts that offers tax free gains as well as withdrawals. However, contributions to a TFSA are not tax-deductible. Some of the benefits of a TFSA are:

withdraw at any time without penalty
You can make a withdrawal at any time without affecting any government benefits.
The amounts you withdraw are not considered part of your income.
There is no age limit for contributing.
Contribution is not dependent on your income or your tax return.
If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.

RRSPs

RRSP is also a registered account purpose of accumulating retirement income. The amounts you contribute are deducted from your taxable income, which may entitle you to a tax refund. However, during withdrawals it is taxed at marginal rate.

RRSPs are especially beneficial for Canadians in a high tax bracket.
The interest generated by your investments is not taxable provided it remains within your RRSP.
You may contribute up to 18% of your eligible earnings or the maximum allowed by the government.
If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.
If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.

RRSP Withdrawals: You may withdraw money from your RRSP however it will count as income and you will be taxed on the amount at a higher tax rate plus a withholding tax. You will also permanently lose the contribution room you used to originally make your deposit. However, if you use RRSP to buy a new property under the Home Buyers’ Plan (HBP) or for school fees, taking advantage of the Lifelong Learning Plan (LLP) you will not be charged.

RRSP must be converted to a Registered Retirement Income Fund (RRIF) by Dec 31 of the year you turn 71.

RRSP or TFSA?

TFSA or RRSP both are great plans. It truly depends on your financial goals, needs and your income. Withdrawals from TFSAs are always tax-free, whether you are working or retired. Withdrawals from RRSPs are always taxable.

You can also combine the two and use your RRSP for your main retirement income, while keeping some money in a TFSA to cover any unexpected expenses without affecting your taxable income.

RRSP, TFSA or both? Need help deciding?

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Saving Accounts vs. Investing? Which one should I do?

Suman — Thu, 10 Jun 2021 17:30:00 +0000

First, it is a very wise decision to either put money into a savings account or invest. Which one should you choose? The answer depends on your financial goals, whether they are short or long-term plans, retirement goals, etc.

Although the word “investment” may sound intimidating, it is not. Investments are for everybody, regardless of your financial situation.

Savings Account:

Setting aside your money and storing it for a future need is called saving. Banks offer savings accounts with fixed or tiered interest rates that are relatively low, starting from 0.005% to 1.5%. A savings account is a low-risk place to keep your money safe, but do not expect large growth.

Pros:

You do not lose your money.
Easy to set up.
Good for short-term savings.

Cons:

Since the return is low, your money won’t grow much.
Due to inflation, your real rate of return might be negative.
Do not expect large gains.
Interest on savings is subject to regular income tax.

Example: If you save $100 a month starting today with an initial deposit of $0 at an annual interest rate of 0.05%, it will be worth $1,200.32 after one year when compounded annually. In short, putting $1,200 in a savings account for a whole year will generate $0.32, subject to regular income tax. Factoring in inflation at 3.4%, your real rate of return is negative. To keep up with inflation, your savings account must give you a higher return than 3.4%.

Investing Accounts:

An investing account also involves storing your money for future needs, but instead of relying on a low interest rate, your money is invested in various assets (ETFs, Stocks, Bonds, Mutual Funds, Segregated funds, etc.) for higher growth with a higher rate of return.

Pros:

Investing products such as stocks can have much higher returns than savings accounts.
Usually best for long-term financial goals (5, 10, 15 or more years).
No taxes on some investment accounts such as a TFSA.

Cons:

Returns are not always guaranteed as they depend on the market.
All investments have a certain level of risk.

Example: If you invest $100 a month starting today in a TFSA with an initial deposit of $0 at an annual rate of return of 6%, it will be worth $1,238.68 after one year when compounded annually. In short, putting $1,200 in a TFSA for a whole year will generate $38.68, and the earnings are tax-free. Even with inflation at 3.4%, your real rate of return is 2.6%, significantly higher than a savings account.

Conclusion:

Consistent investments over several years can be an effective strategy to accumulate wealth. If you have short-term goals, such as saving for a vacation, putting money into a savings account is ideal. If you have long-term goals and a longer time horizon, such as retirement in the next 10-20 years, investing will generate more returns.

It’s up to you to decide whether saving or investing is the better choice to reach your financial goals.

TFSA – Suman Bhandari

RRSP or TFSA?

Saving Accounts vs. Investing? Which one should I do?

Savings Account:

Investing Accounts:

Conclusion: