TFSA & RRSP
Tax Free Savings Account (TFSA)
The tax-free savings account made its debut in 2009, it is a registered investment that allows people to contribute and the income or capital gains earned inside the plan are not taxed. The best part, you can withdraw these funds at any time without tax implications. Additionally, withdrawals from the plan don’t affect your eligibility for income-based credits such as the age credit and OAS.
One of the parameters around this account are the contribution limits, the good news is that the annual contribution limits are cumulative, meaning if you’ve never contributed, you could contribute a whopping $75,500 in 2021. The annual contributions are outlined here:
2009-2012 $5,000 / year
2013-2014: $5,500 / year
2015: $10,000
2016-2018: $5,500 / year
2019 - Present: $6,000 / year
Cumulative Amount as of 2021: $75,500
Consider using a tax free savings account to fund your savings goals such as, major purchases or retirement.
Registered Retirement Savings Account (RRSP)
An RRSP is a great way to save for retirement as well all know, but you can also use them to make a down payment on your first home, or even to go back to school full time!
Who should use an RRSP? Typically, someone who is going to require a pension in retirement, money here can be invested in many different ways and then you withdraw in retirement. Contributions are usually made using after tax dollars, which means the money that lands in your bank account after the government took their taxes. Then when you contribute those funds into an RRSP, you will get the taxes back on your income taxes. You then pay tax on the withdrawals in retirement, the idea is that you are making less money and in a lower tax bracket.
Who is an RRSP not ideal for? If your career has one of those gold standard defined benefit pension plans (think teacher, police officer, municipal worker, etc.), then you will definitely want to evaluate if an RRSP is the right choice for subsidizing retirement income. Those pensions often mean that in retirement your tax bracket is not reduced and RRSP withdrawals could throw you to an even higher tax bracket.
Do consider utilizing an RRSP for retirement savings if you require pension income in retirement. It is recommended that you speak with a qualified financial planner to discuss your particular retirement needs and goals.
