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You have until March 2, 2020 to contribute to your RRSP (Registered Retirement Savings Plan), assuming your contribution is intended to reduce your tax obligations owing for 2019, or generate a bigger refund, come April 30th.  The question, however:  is an RRSP the right instrument for you? 

An individual RRSP is one of the most common types of personal savings plans. Individuals—as well as their spouses or common-law partners—can contribute to these plans up to an annual limit using a mix of investments, including stocks and mutual funds.

What’s more, individual RRSPs have two tax benefits that help you save for your retirement:

  1. Tax-sheltered growth—Investment income in your RRSP isn’t taxed while within the plan. In most cases, investors won’t have to pay any tax until funds are withdrawn. Because you may be in a lower tax bracket once you’re ready for retirement, your total savings can be significant.  However, if you have pension income and/or income from other sources it may be combined with the funds withdrawn from the RRSP for the purposes of calculating your income tax due.  It is possible to create a tax liability for yourself.  Careful planning is essential to minimize tax implications.
  2. Tax deductions—Individual RRSPs can be used to reduce your income tax, as contributions are deductible within specified limits.

In addition, investors can withdraw funds from their individual RRSPs without being penalized, provided the money is repaid by a specified time. This can be particularly useful for large purchases, like buying your first home or paying for your education. That said, if the withdraw is not repaid within the specified time frame, the amount withdrawn will be added to the income earned in the year and the tax assessed on the total income earned.  The penalties can be significant.  Best not to withdraw if you don’t have the capacity to repay the amount in full within the required time frame. 

There are a number of qualifications you must meet in order to open an individual RRSP. Simply put, if you have earned income and file an income tax return in Canada, you can contribute to an RRSP until Dec. 31 of the year you turn 71. You must also have contribution room available, which will be stated on your annual Notice of Assessment sent by the Canada Revenue Agency.

One need also consider the benefits of a TFSA (Tax Free Savings Account) For Canadians 18 years of age or older, TFSAs are a great investment tool. Unlike traditional savings accounts, TFSAs allow you to increase your savings without having to pay tax on the growth within the account. In addition, TFSAs have the following benefits:

  • TFSAs provide flexibility, account owners can use them to save for a variety of uses like home improvements, vehicles, vacations and emergencies. You can withdraw money at any time, for any purpose. Many Canadians invest in a mix of cash, stocks, bonds and mutual funds.
  • TFSAs can be used as an alternative source of income following retirement. What’s more, TFSAs do not need to be converted to income, which provides retirees with a tax-free way to save throughout retirement.
  • TFSAs are a good substitute for registered education savings plans if you’re not sure your child will pursue a post-secondary education but still want to set aside money for them.
  • Income from a TFSA does not affect an individual’s eligibility to receive:
    • Old age security
    • Guaranteed income supplement
    • Goods and services tax credit
    • Other income-tested benefits and tax credits
  • Account owners can contribute up to $5,500 a year. In addition, you can re-contribute any amount you withdraw. In the event that you can’t make your full contribution in one year, you can make up the difference in future years.
  • In the event that the account holder dies, funds from TFSAs can be transferred to a spouse. This can be done without affecting the spouse’s existing TFSA or contribution allowance.

Let us not forget the benefits of a RESP (Registered Education Savings Plan).  An RESP is an investment option sponsored by the Canadian government that helps individuals save for their child’s, grandchild’s, niece’s, nephew’s and similar beneficiary’s post-secondary education. Plan subscribers—those that open an RESP and make contributions into it—designate a beneficiary who can then use the funds to cover expenses related to apprenticeships, trade schools, colleges and universities.

Subscribers can enrol in RESPs simply by opening an account with a bank, credit union or other financial institution. The first $2,500 you contribute each year gets a 20 per cent matching contribution from the federal government using what’s called a Canada Education Savings Grant (CESG). Under CESGs, beneficiaries are entitled to $7,200 of government contributions.

In addition, RESPs have the following benefits:

  • RESPs are flexible, and anyone can open an account for a beneficiary. There are two basic types of RESPs—family and individual plans. The major difference between the two is that, with family plans, subscribers can name more than one beneficiary and funds do not need to be shared equally.
  • Subscribers can contribute any amount to an RESP. However, there is typically a lifetime contribution limit of $50,000 per beneficiary. There are no limits on the number of plans subscribers can establish or RESPs a beneficiary may have.
  • RESPs allow subscribers to get an early start on saving for their beneficiary’s education expenses. In fact, RESPs can be opened as soon as the beneficiary has a social insurance number.
  • Subscribers don’t pay taxes on contributions until the money is taken out. Account holders can make lump-sum contributions at any time or set up automatic payments.
  • Qualifying investments include savings deposits, guaranteed investment certificates and mutual funds.

At the end of the day, one or all of these tools may be right for you along with a mix of other investment vehicles.  The choice of which and the amount of money one invests in each is entirely dependant on what your lifestyle goals are. Many do try to go it alone and some can have success.  Ideally, find an investment adviser that shares your personal values, is a right-fit for you and take the time to listen to what they have to say, ask questions and participate in the development of a comprehensive, flexible and personalized plan that reflects your ability to finance today and that will be able to meet your future lifestyle goals and expectations.  Mistakes can cost you dearly in tax penalties and fees.    

Darren Reith BA,RIB(Ont),RFC,RCIS, CHS

Partner/Director-Financial Services

Reith & Associates Insurance and Financial Services Limited

Tel. 519-631-3862 x 224

Fax. 519-631-0386