If you don’t know what the acronyms RRSP and TFSA stand for, let alone what they mean, don’t feel bad. While I’m passionate about financial literacy and empowerment for all Canadians, we definitely have a long way to go towards better financial literacy for all, so much so that the government is investing tens of millions of dollars in education programs for secondary students and adults. If you’re one of the many Canadians who’s confused over these great savings and investing plans, it’s all good: I’m about to give you the crib notes.
Registered Retirement Savings Plan (RRSP)
Eligibility: An individual who has earned income and has filed a tax return in Canada can contribute up to 18% of their earned income for the previous year up to the maximum ($26,230 for 2018) to an RRSP.
Main benefit: Income and tax deferral. Tax-deductible and tax-sheltered investing.
A Registered Retirement Savings Plan is an account registered with the federal government. Your RRSP account can contain many different types of investments: mutual funds, stocks, bonds, GICs, treasury bills, etc. No matter what type of investment your RRSP contains, it all has the same benefit of being tax-sheltered, meaning that the growth of your investments within your RRSP will not be subject to taxes of any kind while they’re in that RRSP. On top of that, RRSPs are tax-deductible, meaning that you can deduct your RRSP contributions from your total yearly income, lowering your taxable income (i.e., you’ll get a tax refund when you file your income taxes because you “overpaid” your income taxes for that year).
Another cool thing about RRSPs is that you can “borrow” the money you’ve been stashing away in that account to go towards a down payment on your first home or to fund further education. I’ll get into these two programs in another article. Just know that these options are there.
Oh, and don’t sweat it if you don’t have the extra cash to contribute to an RRSP now; the contribution “room” carries over year after year so that you can always play contribution catch-up in the future when you have more money available. To find out how much contribution room you have, it’s written right on your most recent Notice of Assessment (NOA), and via My Account on the Government of Canada’s website.
Rules to remember:
- You can contribute up to 18% of your gross income for the year, up to that year’s maximum.
- By the end of the year you turn 71, you’ll have to start withdrawing from your RRSP, and the amount you withdraw will be added to your income and taxed as such (hence why it’s called a tax deferral strategy).
Tax-Free Savings Account (TFSA)
Eligibility: Anyone who has a Canadian social insurance number and is 18 years old or older.
Main benefit: Tax-sheltered investing—you don’t have to pay any tax on the growth (whether through capital gains, interest or dividends) of the investment in your TFSA account EVER.
A Tax-Free Savings Account is another amazing tax-sheltered and government-registered plan. When you contribute to a TFSA—whether it’s stocks, bonds, mutual funds, or a combination of different types of investments—the growth of those investments are tax-free and, unlike an RRSP, will always be tax free, even when you start collecting income or redeem any or all of the money in the account. Remember, with your RRSPs, you’ll have to pay income tax on whatever you withdraw (unless it’s for the Home Buyer’s or Lifelong Learning Plans), but not so with a TFSA because you’re contributing to it with after-tax dollars, which are not tax deductible.
- You can contribute up to $5,500 for 2018, and the total contribution room as of this year for a Canadian is $57,500.
- Whatever amount of money you redeem from your TFSA will NOT be added back to your income and taxed.
RRSP season is over for now, but that doesn’t mean you can’t start making monthly contributions! Talk to your financial planner, or ask for a referral from friends and family members who seem to have their financial stuff together. If you’re not sure which investment government plan you should prioritize, stay tuned for an upcoming article where I discuss the great RRSP vs. TFSA debate: which one you should focus on, depending on your situation.
After years of building her own investment portfolio (on a young professional’s budget), Melissa became passionate about financial literacy and empowering women financially. Currently, Melissa works as a financial advisor and is pursuing her Certified Financial Planner (CFP) designation. You can find her at @meltalksmoney on Instagram.