When you want to save a substantial amount, whether it’s to travel, buy a house, take a sabbatical, start a business, go back to school or plan your retirement, an adequate financial plan can make all the difference. Selecting a savings vehicle is part of the equation. It will vary, depending on your project or stage in life. You have many options to choose from. The best-known include the RRSP and the TFSA.
Even though we may think we’re familiar with these vehicles, many advisors will tell you that myths persist. So let’s set the record straight by addressing some common misconceptions.
The RRSP is a savings plan registered with the Canada Revenue Agency, and contributions to it are deductible from taxable income; so you can put money aside and increase it on a tax-sheltered basis. The RRSP itself is not an investment. Rather, it’s a vehicle in which you can hold different types of investment, such as mutual funds. What you hold in your RRSP depends on your investor profile.
If many years still separate you from your very last day of work, you may think that planning your retirement isn’t a priority.
But contributing to an RRSP as soon as possible can be very advantageous. When it comes to investing, time is a powerful lever. To accumulate the same amount of capital, a person who is 25 years old needs to make far less effort than someone who is 45. The sooner you start, the less you’ll need to contribute and the more you’ll end up with!
So what is it that makes the difference? The compounding of your return. You earn a return on the capital in your RRSP but also on the earnings that are generated by it and accumulates over time.
If this misconception is preventing you from contributing to an RRSP, two arguments could change your mind:
Contributions to an RRSP reduce your net income, and the returns on your investments are tax sheltered. Before putting your money into a non-registered savings account, you’ll be taxed on it. And the income from your investments will also be taxed. Not the best deal.
In addition, because RRSP contributions reduce your taxable income, they can increase your chances of obtaining, or even increasing, government benefits or credits you may be entitled to.
A contribution to an RRSP reduces your taxable income. In reality, you’re deferring payment of income tax. The advantage is that most contributors will be in a lower tax bracket in retirement than they are when they contribute, so they’ll pay less tax. It’s one way of saving money.
Not quite. You have to pay attention to the annual contribution limit. If you exceed your limit, you’ll get hit with a penalty of 1% a month on the amount over the limit, until it’s withdrawn from the TFSA.
Moreover, any amount withdrawn from a TFSA is added to the contribution limit for the following year. You will have to wait until January 1st of the next year before recontributing any money you have withdrawn. Given that the benefit of the TFSA is that your savings and the income they generate can grow tax-free, the goal is to leave your money in the account as long as possible so that it generates income.
Above all, an excessive number of withdrawals could attract attention from the tax authorities; if you create the impression you trade for a living, you could be penalized. Don’t forget that the TFSA is for individuals.
Actually, it’s the opposite. The fruits of your investments can, in a sense, increase your annual contribution limit the following year. For example, if you withdraw the invested capital plus interest, namely the balance at its fair market value, you could redeposit the entire amount into the TFSA on the following January 1.
If you die, the amounts accumulated in your TFSA are not taxable, and your heirs will benefit from them. However, from death until settlement, the returns are taxable to the estate.
Each case is unique. That’s why it’s important to seek guidance from an advisor when you want to develop a savings strategy.
To obtain sound advice, regardless of your situation, contact the Advisory Services of FÉRIQUE Investment Services. The team of Advisors and Mutual Fund Representatives have the tools to help you build a solid financial plan and a diversified portfolio. They can also advise you on how to optimize your financial situation and increase your savings.
FÉRIQUE is a registered trademark of Gestion FÉRIQUE and is used under license by its subsidiary, Services d'investissement FÉRIQUE. Gestion FÉRIQUE is an Investment Fund Manager and assumes management duties in relation to the FÉRIQUE Funds. Services d'investissement FÉRIQUE is a Mutual Fund Dealer and a Financial Planning Firm, as well as the Principal distributor of the FÉRIQUE Funds. Please note that for commercial purposes, Services d'investissement FÉRIQUE is also known in English as FÉRIQUE Investment Services.
There may be brokerage fees, trailing commissions, management fees and expenses associated with investment in the Funds. Management expense ratios vary from one year to another. Please read the prospectus before investing. Mutual funds are not guaranteed, their values fluctuate frequently and past performance may not be repeated.
This document is intended for informational purposes only. The information provided does not constitute investment, financial, legal, accounting or tax advice. You should not act on the information without seeking the advice of a professional.