For the latest blog on our Servus Credit Union financial journey, we start to dive into the real meat and potatoes of savings. And as it turns out, this is also the part of savings where I get overwhelmed and confused. TFSAs and RRSPs. What are they? What’s the difference? What should we be invested in? How do we invest? How do I listen to our financial advisor Brock’s advice without falling asleep because I find this stuff as boring as watching paint dry??
All good questions.
So, when we met with Brock I asked him to explain it to me like I was a five-year-old, because honestly when it comes to investing I might as well be.
Jane has a VERY good grasp on the ins-and-outs of investing and how to take advantage of the tax implications for different accounts. For that reason, I have not paid much attention to it. If Jane were to get hit by a bus tomorrow I would have little-to-no idea what I was doing and would hope there was a way I could just hit a “do-the-same-thing-my-wife-was-doing,” button.
Granted, that’s not much of a plan. Thankfully, financial advisors like Brock, are here to help and dumbed it down for me, without ever making me feel like he was talking down to me, and that’s huge.
TFSA vs RRSP – what are they?
When I asked the question to my followers on Instagram of what financial advice they were looking for a few people asked insightful questions like, “When should I transfer my savings strategy from growth to more conservative?” But a majority of the questions were along the lines of, “How do I get started?” Or, “what should I start saving with?”
This is where TFSAs and RRSPs come in.
In their very simplest of simple terms, they’re long term savings plans that are offered by the government to help reduce a person’s taxes and encourage saving for your future. They are meant for medium, to long-term savings.
Let’s break them down individually.
What is a TFSA
Introduced in 2009, a Tax Free Savings Account or TFSA is meant to give Canadians a flexible savings tool. While it’s designed for retirement savings, it can actually be utilized for any sort of savings you want.
TFSAs are open to anyone as soon as you turn 18 and have no expiry date. They allow you to contribute and withdraw from a tax-sheltered account easily and without penalty. You can actually make tax-free withdrawals from your TFSA anytime, for any purpose you want. When you get to retirement and start pulling your money out the government does not look at your TFSA withdrawals when considering how much money to take off of your Old Age Security. Inside of a TFSA you can have a normal savings account, investments etc.
For 2021 you can contribute $6000, however, if you have any unused room from previous years you can contribute that too. You can also pay back any amount you have withdrawn from the account in previous years. If you were 18 or older in 2009 when the program started you can contribute up to $75,500.
What is an RRSP?
Introduced in 1957, Registered Retirement Savings Plans are the most popular vehicle for retirement savings for Canadians. Inside an RRSP you can have savings, investments, GICs etc.
One of the best things about RRSPs is that when you put money into them, you can claim a tax deduction in the year you make a contribution. This means you don’t pay any taxes at all on the money you put into your RRSP. If you’re a student that is not making much money, then this won’t be a big advantage for you, however, if you’re a family making a steady income or in a high tax bracket, this is a great way to reduce your taxable income.
The maximum RRSP contribution is 18% of your gross income, or $27,830, whichever is lower. Any unused contribution room can be carried forward to the next year.
When you retire you take money out of your RRSP to use as your income. You do pay taxes on the amounts withdrawn. RRSPs are designed for retirement which is why there are penalties for withdrawing your money early, HOWEVER, there are two exceptions to that rule.
First, the Home Buyers Plan allows you to withdraw up to $35,000 for a down-payment on your first home and allows you to repay it over 15 years with no penalty.
Second, the Lifelong Learning Plan allows you to withdraw $10,000 a year to a maximum of $20,000 for school and allows you to repay it over 10 years without penalty.
Is that all clear as mud?
Sum it up for me!
TFSA and the RRSP help you save taxes in different ways. For a TFSA the money you put into the account you have already paid taxes on. You don’t pay any taxes on withdrawals or anything your money may have earned through investments.
On an RRSP however, you don’t pay taxes on the money you contribute, but once you start withdrawing the money you do pay taxes on everything including growth.
Make it easy for me, Which one should I invest in?
The short answer? Both.
But it also kind of depends on your goals. Saving for a trip or a home renovation? Then use a TFSA. Saving for retirement? Then either can work for you. And now is the time to invest at Servus where your investments earn you entries towards a prize of one million dollars!
When thinking about retirement, there are different tax implications for each, but in the end, they can work out very similarly. Young & Thrifty provide this stellar chart that breaks it down.
| TFSA | RRSP | |
| Gross Earned Income | $1,000 | $1,000 |
| Income tax (30%) | $300 | $0 |
| Net Contribution | $700 | $1,000 |
| Value after 30 years at 6% | $4,020 | $5,743 |
| Income tax at withdrawal (30%) | $0 | $1,723 |
| NET | $4,020 | $4,020 |
Now, this makes a few assumptions and guesses, but generally speaking, this gives you an idea of what an investment would look like over 30 years.
What it comes down to
When it comes to investing, the biggest thing you can do is start. Accounts can start making you money for as little as $25, and if you’re thinking you barely have enough money to get through each month, let alone to start saving for retirement, then start with tracking your spending. Budgets are easy to make, but if you don’t actually know how much you spend each month on things like groceries, gas, eating out etc. then it’s impossible to make a realistic budget that starts to set aside money for retirement.
Planning for retirement starts with understanding your goals and a Servus financial advisor works with you to develop personalized savings/investment strategies to achieve them.
And like I’ve mentioned before, a great boost to your retirement savings would be winning ONE MILLION DOLLARS, in the Servus Big Share Contest™! Every $500 increase to your savings earns you one entry into the contest. Click here for more information on Servus and to enter to win one million dollars!
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