You work hard for your money. Once you start saving it, what should you do with it?
It’s a simple question with a not-so-simple answer.
One option is to put your money in a registered savings plan and take advantage of unique tax benefits.
In Canada, you can choose from a variety of different savings accounts which are registered with the Canada Revenue Agency (CRA).
You’ve probably heard of RRSPs and TFSAs. But did you know there are other types of registered savings plans?
“Every plan has a specific role. As advisors, we try to find out what you’re trying to achieve,” says Leslie Hanson, a Financial Advisor at Cambrian and Aviso Wealth.
“Then, we can determine how each of those plans, some of them, or just one of them will help you reach your financial goals.”
Which type of registered savings plan should you use? We’re covering the unique benefits of each, with advice from Leslie Hanson.
Without a registered savings plan, any income you generate from your investments will be taxed. This is called a non-registered account.
But if you save money in a registered account, you can defer taxes until you withdraw the money or shelter your investment earnings from tax.
Tax-deferred: Your money and investment earnings are only taxed when you withdraw them from your account.
Tax-sheltered: You pay taxes on the money you deposit, but not on the growth of the investment.
With a TFSA, you’ll never pay taxes on the investment growth. With an RRSP, RESP, RRIF, or RDSP, your money grows tax-sheltered when it’s in the account—but you’ll be taxed when you withdraw the money.
It’s important to note that registered savings plans are not investments on their own. They are accounts that you hold investments in.
“If I said I had a car, you’d probably wonder which type of car I had,” says Leslie. “You can think of your savings account as the vehicle, and your investments as the specific type of vehicle.”
You can only hold qualified investments in a registered savings account, such as stocks, bonds, GICs, and mutual funds. If you put a non-qualified investment in your registered account, you will face tax penalties.
Next, we’re going over the different types of plans, and how they can help you save money:
Introduced in 2009, TFSAs give Canadians a way to invest their savings without paying taxes on the income they earn. You can open a TFSA once you turn 18.
As long as your investment is inside of a TFSA, your investment earnings won’t be taxed.
You can only contribute so much to your TFSA—excess contributions will be penalized. Each year after you turn 18, you’ll get more contribution room.
To learn more, check out our blog on What You Need to Know about Tax-Free Savings Accounts.
RRSPs were first introduced in 1957. This savings plan took off to a slow start, with just 1 of every 50 tax filers reporting contributions in the first year.
But matters have certainly changed since then. In 2020, more than 6 million Canadians made RRSP contributions.
What makes RRSPs such an effective way to save for retirement?
When you contribute to your RRSP, you can deduct that money from your income. That means you don’t pay taxes on those contributions.
You only pay taxes when you withdraw the funds—after you retire.
Since your income is generally lower during retirement years, you’ll be taxed at a lower rate.
For an overview of RRSPs, take a look at our recent blog: It’s RRSP Season: What You Need To Know.
If you’ve saved up a retirement fund through your RRSP, how do you withdraw those savings once you retire?
A RRIF is an account you open when that day comes. It’s what you use to access your retirement savings.
“A RRSP is what you use when you’re in the ‘savings mode’. With a RRIF, you’re starting to spend what you accumulated while you were working,” says Leslie.
“One is a savings vehicle, and one is a spending vehicle.”
When you retire, you convert your RRSP to a RRIF. You’re free to choose the age you retire, but you must convert your RRSP to a RRIF by the end of the year you turn 71.
With a RRIF, you only pay taxes on the money you withdraw—not the total balance of your account.
Your withdrawals are taxed at your marginal tax rate, which is determined by your personal income for that year. By withdrawing a portion of your RRIF each year rather than the entire balance, you can lower your tax rate.
Example:
You retire at age 65 with $500,000 in your RRSP.
If you were to withdraw the entire balance at once, your income would be taxed at 50.40%.
Instead, you convert your RRSP to a RRIF. You withdraw $30,000 from your RRIF over one year.
This reduces your annual income from $500,000 to $30,000 for that year (not factoring in any income you may earn through the Canada Pension Plan, Old Age Security, or other sources of income).
As a result, your marginal tax rate drops to 25.80%. You have $470,000 left in your RRIF to withdraw in future years.
By only withdrawing what you need from your RRIF each year, you can pay less in taxes.
What’s the difference between RPPs and RRSPs?
“You can’t open a RPP on your own; it’s done through your employer,” says Leslie.
A RPP can either be a defined benefit or a defined contribution plan.
A defined benefit plan provides you with a guaranteed amount upon retirement. This is determined by a formula that factors in your salary, the number of years you’ve worked at the company, and your age.
With a defined contribution plan, you make contributions to the account, and your employer matches them up to a percent of your salary.
“If you have a defined contribution plan, find out what the matching is. Take advantage of the full matching if you can,” says Leslie. “Even if you can’t do the full amount, try to take advantage of at least some of it.”
Planning to save money for your child's or grandchild’s post-secondary education? If so, you may be interested in opening a RESP.
This account is specifically for parents or guardians saving for their child’s education.
The tax benefit of a RESP is it’s tax-deferred. Investments in the account can grow tax-free until the funds are withdrawn.
When it’s time to withdraw the money, it will be taxed at your child’s marginal tax rate, not yours. As a result, they’ll pay less in taxes.
RESPs have a lifetime contribution limit of $50,000 for each child.
Thanks to the Canada Education Savings Grant (CESG), you can also access government grant money and add it to your RESP, regardless of your income level.
The government will match 20% of your contributions to a RESP, up to a max of $2,500 annually. The maximum you can receive from the CESG is $7,200 per child.
The RDSP is designed to help Canadians with disabilities reach their financial goals.
“Many people qualify for the RDSP but aren’t aware of what it is or how it works,” says Leslie. “If you’re getting the Disability Tax Credit, you can have a Disability Savings Plan.”
The RDSP account holder may be eligible for government grants and bonds up until the end of the year they turn 49.
With the Canada Disability Savings Grant, the government will contribute to an RDSP until the account holder turns 49. The maximum yearly grant amount is $3,500 annually, to a maximum of $70,000.
For low to moderate income families, there’s also the Canada Disability Savings Bond. The government will contribute $1,000 annually to your RDSP (with no contributions from the RDSP account holder required), up to a limit of $20,000.
Just like an RRSP, the tax advantage of a RDSP is that it’s tax-deferred; you won’t pay taxes until you withdraw the money. Your investment growth will be tax-sheltered until it’s time to withdraw from the account.
And if you’re supporting someone with a disability, you can open a RDSP on their behalf and contribute to it.
That depends on what your goals are.
Are you planning to grow your savings over many years? Trying to minimize your taxable income? Or looking to support your child's education or a person with a disability?
Depending on your answers, the right savings plan for you will vary.
“As advisors, we have discovery meetings with our members to find out exactly what it is they’re looking for,” says Leslie. “Someone could say, ‘I think I need a RRSP’, but maybe a TFSA is better suited to meet their financial goals.”
Not sure which plan is right for you? Whether you’re saving for a down payment, your child’s education, or your retirement, our advisors can help you make a plan that meets your needs.
“Let’s have a conversation to find out what you’re looking for, how it fits into your financial plan, and the roadmap for your financial journey,” says Leslie.
Book a meeting with a Cambrian Advisor today!
Disclaimer
Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.
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