RRSP Information

TFSA vs RRSP: three things to consider

TFSA or RRSP? While both options shelter investments from taxation and can hold an array of different assets — GICs, mutual funds, bonds, stocks, etc. — they differ greatly on certain points. The best place to invest your retirement savings depends on your financial goals and priorities.

Taxation

TFSA investments hold after-tax income, and contributions cannot be deducted from your annual income tax. The opposite is true for an RRSP: yearly contributions can be deducted from your tax return but you’ll be required to pay taxes when you eventually withdraw the funds. If you expect to earn less income in your retirement years than you did on the job market, RRSPs are a good choice that involves paying less tax in the future.  

Maximum contribution

Both TFSAs and RRSPs have yearly caps on the amount you can contribute. The limit for TFSAs in 2016 was $5,500 per year. However, for those who opened a TFSA for the first time, the maximum contribution was $46,500 for the first year (the regular limit is implemented in subsequent years). The cap on RRSP contributions in 2016 was the lower of either $25,370 or 18 per cent of the previous year’s income. Any unused contributions can be carried forward to future years.  

Withdrawal

TFSAs and RRSPs both provide the most benefit when used to invest in long-term equities. However, TFSAs can be withdrawn at any time without restrictions or penalties. (Some investments within the TFSA are characterized by specific constraints, however.) RRSPs on the other hand cannot be withdrawn prior to retirement without substantial penalty, except under two circumstances: the Home Buyers’ Plan (up to $25,000) and the Lifelong Learning Plan (up to $20,000 total and $10,000 per year).

Five facts about RESPs

The Registered Education Savings Plan (RESP) is one of the best tools available for parents wishing to alleviate — or eliminate — the financial burden of their children’s future educational endeavours. Here are key things to know about these tax-sheltered accounts.

1. RESP contributions cannot be deducted from income tax, but earnings accrued via interest will not be taxed until the funds are withdrawn.

2. There is no annual cap on contributions to RESPs. However, there is a lifetime limit per child of $50,000.

3. Under the Canada Education Savings Grant (CESG), any RESP beneficiary stands to gain up to $7,200 in grant money from Employment and Social Development Canada (ESDC). ESDC pays 20 per cent — up to $500 per year — of annual contributions to an RESP, regardless of family income. Families with an annual income below $89,401 receive an extra 10 per cent on the first $500; those earning $44,701 or less qualify for an additional 20 per cent.

4. In addition to the CESG, ESDC issues the Canada Learning Bond to modest income families, depositing up to $2,000 into each child’s RESP. Families that qualify for the National Child Benefit Supplement (NCBS) — now packaged within the Canada Child Benefit (CCB) — are eligible. The ESDC grants an initial $500 to open the RESP and $100 for each subsequent year (up to 15 years).

5. If the beneficiary doesn’t pursue post-secondary education, his or her RESP can be transferred to a sibling. Alternatively, you can move your investment and the accrued interest into an RRSP or cash it out. In both of these cases, government contributions (and any interest they’ve generated) must be returned to the government.

Registered retirement savings plan

An RRSP is a savings strategy for your retirement that allows you to invest on a tax-deferred basis.

Your contributions to the plan are allowed to accumulate, along with investment income, on a tax-free basis until the funds are withdrawn during your retirement years. This delay is significant because, although the funds will be fully taxable at that time, you will likely have entered a lower-earning phase of your life, and your tax rate will be lower.

Contributions to an RSP can only be made by individuals with “earned income” taxable in Canada. Earned income includes salaries, self-employment income, maintenance and alimony payments, and net rental income (but does not include income from pensions or investments). If you are not sure about other types of income that may be eligible, consult a tax advisor or the Canada Revenue Agency (CRA).

RRSPs are registered with the CRA, and their issuance is supervised by an approved financial institution to ensure that rules are strictly followed.

Canadians can contribute to their RRSPs up until the year they turn 69. At that point, RRSPs must be closed down. Investors can then withdraw money or convert it into a Registered Retirement Income Fund or annuity that will pay regular income. In both cases, any money received is taxed.