Month: February 2023

Have you heard about ChatGPT? It is a chatbot that is powered by an Artificial Intelligence. It has a reasonable knowledge base behind it, but remember to take things with a grain of salt (at least for the next few years).

Disclaimer: This is a very generalized article. The basis of it probably applies to your situation, but the details may not. And while I am a financial advisor, I am not YOUR advisor (unless, of course, we do have the advisor-client relationship). You should talk to your (an) advisor before taking action because of this article!

Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are two of the most popular savings options in Canada. Both of these savings plans offer benefits and drawbacks, and the right choice for you depends on your financial goals and circumstances.

RRSPs are savings plans designed specifically to help Canadians save for retirement. Contributions to an RRSP are tax-deductible, and any income earned within the RRSP is not taxed until it is withdrawn. This tax-deferred growth can help boost your retirement savings over time. Additionally, RRSP contributions may lower your taxable income in the year you make the contribution, which can reduce the amount of taxes you owe.

TFSAs, on the other hand, are savings accounts that allow you to earn investment income tax-free. Unlike RRSPs, contributions to a TFSA are not tax-deductible. However, any income earned within a TFSA, including investment earnings, capital gains, and dividends, is not taxed when withdrawn. TFSAs are a good option for individuals who want to save for short-term goals, such as a down payment on a house or a vacation.

When it comes to contribution limits, RRSPs have a annual contribution limit that is based on your income, while TFSAs have a set annual contribution limit that increases over time. Currently, the annual contribution limit for TFSAs is $6,000. Withdrawals from an RRSP are taxed as income in the year they are made, while withdrawals from a TFSA are tax-free.

Another key difference between RRSPs and TFSAs is that RRSPs have a deadline for making contributions for the current tax year, which is typically in the first 60 days of the following year. TFSAs, on the other hand, have no deadline for contributions, and unused contribution room can be carried over from year to year.

In conclusion, both RRSPs and TFSAs offer benefits, and the right choice for you depends on your financial goals and circumstances. If you are primarily focused on saving for retirement, an RRSP may be the better option, as contributions are tax-deductible and investment growth is tax-deferred. However, if you are saving for short-term goals, a TFSA may be the better choice, as contributions are not tax-deductible, but withdrawals are tax-free. Before making a decision, it is important to consider your financial situation and consult with a financial advisor to determine which option is best for you.

For the rest of the month, you will be bombarded with ads for RRSP investments. But is the RRSP the right vehicle for you to invest in?

Disclaimer: This is a very generalized article. The basis of it probably applies to your situation, but the details may not. And while I am a financial advisor, I am not YOUR advisor (unless, of course, we do have the advisor-client relationship). You should talk to your (an) advisor before taking action because of this article!

What is an RRSP?

Let’s review the RRSP. It is a tax deferral. You take after tax dollars, invest into an RRSP, claim the amount invested as a deduction against your taxable income, and receive a reduced amount of taxes owing due to this. If your taxes owing goes negative, you get a refund. This in effect converts your contribution to a pre-tax investment.

Withdrawal Time (Retirement)

When you withdraw the money from your RRSP years down the road (i,e, retirement) , it is now taxable income. So you pay taxes on the withdrawal.

If you contribute when you are in the first tax bracket (income less than $50,197 in 2022), you save the 1st tax rate (about 15%). But if when you withdraw the money, your pension, CPP, OAS, GIS puts you into the second tax bracket, your RRSP withdrawal now is taxed at the second rate (20%). So by deferring the taxes, you are actually paying more taxes than had you invested in a non RRSP account.

TFSA

Contrast to a TFSA account. Once again, you take after tax money and contribute. The options to invest in are usually the same (or very similar) as what’s available in the RRSP, so lets pretend you bought identical investment funds within the accounts. For this comparison we will assume identical returns within the RRSP vs TFSA. When you take money out of the TFSA, you do NOT pay taxes on the withdrawal. You will have an extra 15% or 20% (or more) at withdrawal time.

Conclusion

At the end of the day (assuming same contribution date and withdrawal date), you keep more money coming out of the TFSA than out of the RRSP, UNLESS you also invest the tax refund. The power of compounding will make the RRSP worth more if you do in fact also invest the refund into your RRSP.

Now, if you are in a higher tax bracket at contribution time, the calculations change. This is why it is important to speak with an advisor!

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