The first 60 days of the year in the financial world are referred to as RRSP ‘season.’ So what is RRSP season exactly? Certainly not as full of the enjoyment and spirit of the holiday season we just experienced, but important none the less. RRSP (Registered Retirement Savings Plan) season is the first 60 days of the year during which you can make RRSP contributions and claim a deduction for the previous tax year. This season, you will be able to claim a deduction for all eligible RRSP contributions made by March 1, 2019, from your 2018 income when you file your tax return.
Instead of finding the means to make a lump-sum investment each RRSP season, a better strategy is to contribute to your RRSP regularly though a monthly plan. You’ll get the benefit of compound interest and still be able to take advantage of tax deductions for the applicable tax year. Compounding will help your savings grow over time, so the sooner it’s invested, the more time for it to grow.
Many Canadians believe that it is better to invest in a TFSA than in an RRSP, assuming that TFSAs are better tax-saving vehicles because they are completely tax-free.
A TFSA (Tax-Free Savings Account) is ideal for short- to medium-term savings for major purchase or events like a new car or special vacation. It is true that a TFSA may be a better choice than an RRSP in some cases, such as if you expect to be in a higher tax bracket when it comes time to draw upon your savings. Other factors that can affect the choice is if someone is a lifetime lower income earner. In a lower-income environment during retirement, your eligibility for government supplements will not be affected by TFSA withdrawals.
Money deposited to a Tax-Free Savings Account (TFSA) is not tax-deductible but your contributions inside of it grow tax free. Money invested in a TFSA remains tax-free throughout the life of the depositor, and interest earned is not taxed, even when money is withdrawn. The new 2019 Tax-Free Savings Account (TFSA) contribution room limit is a great incentive for those who have the funds or are working on saving. The Canadian government has raised the annual contribution limit for Tax-Free Savings Accounts (TFSAs) to $6000 in 2019, up from $5500 last year. The accumulative contribution limit for TFSAs since they became available in 2009 is $63,500. That is a lot of tax-free savings potential.
Generally, an RRSP is the better choice for retirement savings.
Although you pay tax on RRSP savings at the time of withdrawal, remember that you received a tax deduction when they were contributed. Your tax rate is likely to be lower in the year of withdrawal during retirement than it was when you invested during income-earning years. This equates to an even better after-tax rate of return on your RRSP investment.
RRSPs are designed to be used as savings vehicles for retirement, but they offer some added benefits. Through the Homebuyers Plan and the Lifelong Learning Plan, RRSP funds can be used toward buying a first home or paying for post-secondary education.
So what’s the ‘right’ amount? That depends upon your age, investment risk, and desired retirement income but simply making affordable contributions on a regular basis can truly add up. Even as little as $25 each month when you start out can accumulate over time and mean a better retirement income. The key is just to start.
At OMISTA Credit Union, our customers are our shareholders and that means your best interest is in our best interest. You will always be treated with honesty, fairness, and trust.
We can help get you on track for the kind of retirement you really want. Or get you closer to your savings goal faster than you thought possible. We're here to take a look at the big picture and help you save for what really matters. No obligation, no strings―just sound advice.
Would you like to learn more about the differences and benefits of RRSPs and TFSAs, or how to start saving? Contact us today and start putting more away for your future.
Trisha Leaver, OMISTA's Senior Marketing Manager, has a passion for sharing the credit union difference and empowering New Brunswickers to choose a better way to bank