Learn the basics
A Registered Retirement Savings Plan (RRSP) is an account designed to help Canadians plan for their future. Your RRSP is an investment portfolio, meaning it can hold a variety of investments like mutual funds, ETFs, guaranteed investment certificates (GICs), bonds and equities.
Essentially, by “registering” your retirement savings plan you’re entering into a contract with the government: you put money away for retirement and they provide some perks. And those perks are what make RRSPs special.
Anything you contribute to your RRSP is not taxed until you withdraw funds at retirement, which means more money down the road. Say you make $50,000 this year and put $5,000 of that in your RRSP account. This contribution can be deducted directly from your income so that only $45,000 is considered taxable by the government.
Another benefit is that any investment gains you make within the RRSP are able to grow tax-deferred until you withdraw money from the account. When interest and earnings on investments are not taxed, you gain more, leading to more money for you to spend in retirement. When you do begin to withdraw money from your RRSP, you’ll most likely be retired and earning much less than when you were working, and will therefore be in a lower tax bracket.
Since an RRSP is a registered plan, there are rules around how much you can invest and for how long. First, you can contribute to your RRSP until December 31 of the year you turn 71, then you have to convert it to another vehicle, such as a RRIF. Second, there is a maximum you can contribute. The amount changes from year to year. For 2018, the total amount that can be contributed is the lesser of $26,230 or 18% of your earned income the previous tax year (plus any unused RRSP deductions from previous years). In 2019, the limit will be bumped to $26,500.
The Tax-Free Savings Account (TFSA) was introduced in 2009 to encourage people to save for retirement. You’re eligible to start contributing as soon as you turn 18.
This account can hold a basket of investment products – GIC’s, mutual funds, ETFs, stocks, bonds, etc. And even though the money you put into your TFSA is ‘after-tax income,’ the gains you make from the investments inside are tax free. There’s good news on the withdrawal side too. You can withdraw money from your TFSA at any time and withdrawals are not taxed.
Maximum annual contributions can change each year, so for 2018 you can put in up to $5,500, but check back next year to keep on top of the limits. Any unused contribution room can be carried forward to future years, and if you do decide to withdraw money, the withdrawal amount is added back to how much you can contribute the next year.
The fact that the money you take out of your TFSA isn’t considered income is even more important for retirees. Why does this matter? It means you can take money out without it affecting other benefits (like Old Age Security) that are based on income.
They’re both investment accounts with tax advantages but there are important distinctions between the two:
This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.
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Time is on your side
when you start saving
for retirement early.