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Tax planning

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RRSP and TFSA myths and realities

It’s that time of year when you’re constantly being reminded of the importance of saving for retirement. Despite everything you hear about the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA), some misconceptions may be preventing you from contributing. And some myths may be creating confusion.


The RRSP season is in full swing

At this time last year, we presented an article that addressed some of the misbeliefs (myths #1 to #6) that can undermine your will to save. We now offer a follow-up article, hoping to clarify things for you even more.

Mythe 7 : RRSPs are not very advantageous

Sooner or later, you’ll have to pay taxes.

It’s true that you’ll be taxed when you make withdrawals from your RRSP. But, if the withdrawals take place during retirement, there’s a good chance your marginal tax rate will be lower than during your working life. So, from tax standpoint you’ll come out ahead.

In addition, your savings will grow on a tax-sheltered basis and could generate attractive returns.

Mythe 8 : It’s better to pay off your debts than to contribute to your RRSP

Maybe yes, maybe no. If your debts come with a high interest rate, such as credit card debt, it’s probably best to pay them off first.

That said, rather than trying to pay off low-interest debt more quickly, such as a mortgage or a student loan, you may be better off contributing to an RRSP. Keep in mind that when it comes to saving, time is the most powerful lever. Each case is unique. You should consult a professional for this type of decision.

Mythe 9 : You can use a TFSA like a piggy bank, without any consequences

The TFSA’s flexibility in terms of withdrawals makes it a good savings vehicle for all your projects.

Even so, we can never repeat it enough: the idea is to grow your savings on a tax-free basis. If you make frequent withdrawals, it will take much longer to achieve your goal.

Above all, there are certain contribution rules you must follow. If you want to put amounts you’ve withdrawn back into your account, it’s essential to respect the annual contribution limit and your contribution room. Any overcontribution will give rise to a potentially costly penalty.

Mythe 10 : You need employment income to contribute to a TFSA

You don’t have to have employment income to open a TFSA. Any Canadian resident aged 18 or over can contribute without any problems.

Contribution room is based on annual limits, which are imposed by the Canadian government and have been accumulating since 2009. The individual’s age also affects the amount that can be deposited into a TFSA. For example, if you turned 18 in 2015 and have never contributed, your contribution room corresponds to the total of limits from 2015 to 2020.

Advice plus valuable support

There’s a lot of information available about RRSPs and TFSAs. To make the most of it, it’s important that you find out more, preferably by consulting an advisor who can provide a savings strategy adapted to your situation and the answers to all your questions.

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