Regardless of the time of year, it’s important that you have a solid understanding of the basics of registered Retirement Savings Plans (RSP) and Tax-Free Savings Accounts (TFSA). Before the annual contribution deadline approaches, let’s take a step back, learn about these two important savings vehicles, and discuss the best way to use them to invest for your retirement.
Before you decide between contributing to an RSP or a TFSA, make sure you understand the facts. Let’s first take a look at RSPs.
Retirement Savings Plans (RSP)
- RSPs are registered through Canada Revenue Agency (CRA) and are designed to encourage us to save for retirement.
- RSPs can contain investments such as stocks, bonds, mutual funds, ETFs, GICs, and savings accounts.
- Contributions are tax deductible based on your marginal tax rate when you put the money in. So, if you make $100,000 a year, your marginal tax rate is 43.41%. This means if you put $1,000 in an RSP, you’ll get about $430 “back”. If you make $30,000 a year, the same $1,000 contribution will get you about $200 back with your 20.05% marginal tax rate (all figures are for those living in Ontario).
- You defer paying tax on the money and any interest it gains until you withdraw it, presumably in retirement.
- When you withdraw the money, it is considered income and you will pay taxes on it according to your marginal tax rate at that time.
- Your RSP contribution limit for 2019 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,500. For 2018, the upper limit was $26,230. If you have a company pension plan, your RSP contribution limit is reduced
- Any unused room is carried forward indefinitely. Check last year’s Notice of Assessment to see how much room you have available. You’ll pay a penalty if you over contribute.
- RSP has no starting age limit – anyone that has earned income and filed a tax return can contribute to an RSP the following year.
- RSPs need to be converted to an RIF (Retirement Income Fund) by the end of the year you turn 71. Then, RRIF owners must withdraw a certain amount each year.
Tax-Free Savings Accounts (TFSA)
- In 2009, a new incentive for Canadians to save and invest was introduced.
- The annual contribution limit for TFSAs has changed from year to year. The annual contribution limit for 2019 is $6,000 and if you have been a Canadian resident since at least 2009 and have never contributed to a TFSA, you can contribute up to $63,500.
- Withdrawals from TFSAs result in additional contribution room in the year following the withdrawal.
- The name ‘Account’ is a little bit misleading. TFSAs can actually hold any type of RSP-eligible investment, including stocks, bonds, mutual funds, ETFs or cash deposits.
- Any Canadian who is over the age of 18 and has filed a tax return can open a TFSA.
- Unlike RSPs, contributions are not tax deductible.
- The good thing is any investment income (such as interest, dividends or capital gains) earned inside your TFSA will not be taxed, ever. So, when you withdraw money from your TFSA, you do not have to pay any income tax on it.
If you have additional questions regarding how best to plan for retirement, or improve your overall financial well-being, a Money Coaches Canada Money Coach can help. Or, if you are interested in a second opinion on your investment portfolio, consider the Investment Report Card from Money Coaches Canada.
Christine White is a Money Coach and Educator, helping families focus their finances and put their money where their heart is.
This post first appeared in 2017. It has been updated with current data and/or information and republished.