I’ve just realized that there aren’t that many Canadian blogs out there talking about money, or investing in general.
So here’s my one and only post on “What’s up for Retirement Options” for Canadians:
Registered Retirement Savings Plans (RRSPs)
They are not an actual investment or product that you can buy.
Think of it as an account with the federal bank.
It is simply a plan where Canada allows you to put in money to save for retirement, up to a certain amount each year as a percentage based on your income.
Where you decide to put that money you’ve contributed to this plan, is totally up to you: in bonds, stocks, index funds, mutual funds, GICs, savings accounts.. etc
Key points:
- How much you are allowed to save, is calculated as a percentage on your income
- Whatever you contribute, is deducted from your taxes for the year you contributed
- You will not pay taxes on anything until you go to retire & withdraw your money
- You can carry forward any unused RRSP contribution space from previous years
- If you try to withdraw the money before you retire (65), you’ll pay at hefty penalty
You can withdraw the money in exceptional circumstances, like for education or for a home, but you will be put on a fixed schedule where you have to re-contribute the money back into your RRSP, or face a penalty.
Best for:
General savings for retirement.
It forces you to put in money and not take it out, and a lot of companies do a 100% match, which means free money for you if you contribute.
If you are making a lot of money now, you can also write off a tax deduction of what you contributed.
Then, when you go to retire, if you take out less than what you were earning when you first contributed, you will be taxed at a lower tax bracket.
Tax-Free Savings Accounts (TFSAs)
Also not an actual investment or product that you can buy.
It is like a savings account, but any interest you earn is yours to keep without having to worry about it being taxed.
You are also not limited to a savings account. You can put it in bonds, stocks, index funds, mutual funds, GICs, savings accounts.. etc
Key Points
- You must be 18 years of age or older
- You are only allowed to save a fixed amount of $5000 a year (starting Jan 1st)
- You put in your after-tax money, that means it is NOT tax-deductible
- You pay taxes on that $5000 for the year you contributed, but none thereafter, even when you retire and withdraw your money
- You can carry forward any unused TFSA contribution room ($5000/year) from previous years
- And the best? You can withdraw & pay it back any time you want
This means if you didn’t contribute your $5000 in 2009, you can put in $10,000 this year.
So if you decide to withdraw all $10,000 for a down payment or an emergency, you can put the $10,000 back any time you want, without having to pay any taxes or penalties.
Withdrawals also don’t affect your eligibility for federal government benefits like GST/HST credit, Child Tax Benefits or Old Age Security.
Best for:
Anyone in my opinion. This is my favoured option of the two, although I contribute to both.
It’s really great for people who want to save for retirement, but need liquid or emergency savings in the meantime — just put it in a high interest savings account and you can decide to buy stocks or funds with it later when you are more comfortable with your cash flow.
It’s also great for budding investors. I put in $5000 in my TFSA with Questrade, and the $300 I’ve made so far on it, is not taxed.
If I had tried to invest outside of a TFSA with my $5000, I would have been taxed on the $300 I earned.
Think about the major difference this way:
If you put $5000 into a stock under a TFSA, and it makes you a million dollars over night, you will not be taxed on those earnings if you decide to withdraw the million and $5000.
But if you put $5000 into an stock under an RRSP, and it makes you a million dollars over night, you can’t take the money out unless in exceptional circumstances (education or home).
And when you go to withdraw the money at retirement at 65, you will have to pay the taxes on that amount, depending on how much you decide to take out each year.
Here’s a handy comparison chart for you to keep:
Click on it to make it larger.
Happy Saving!
P.S. I made it into the Carnival of PF this week over at Cash Money Life with my Haggling post.
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Just a girl trying to find a balance between being a Shopaholic and a Saver.
I cleared $60,000 in 18 months earning $65,000 gross/year.
Now I am self-employed, and you can read more about 
Just one correction, at least from what I've been told: if I were to withdraw the $10,000 I already have in my account tomorrow or any time in 2010, I can't fund it until January 2011…
Oh really? As I understood it, if you put in $10,000 in any of your accounts, and you withdraw them at any time, you can also put the money back into those accounts at any time you choose. The next week, 6 months later, or even 5 years later.
The contribution room doesn’t decrease or change. Kind of like a placeholder.
Where did you get that info?
I recall hearing that piece about waiting the following year to return money into your TFSA from the bank I’ve got my current mutual funds in (RBC). Now there’s something to talk about…mutual funds. I’ve been reading much about that lately, and really wanting to revamp how I’ve got everything setup. I’ve been wanting to post a note on this in Facebook world. We really are getting screwed over by fees…
Thanks for the tip!
(And to everyone else who pointed that out)
I was under the wrong impression about returning cash to the account.
Re: Mutual fund fees — I hear ya. I’m with TD Bank mutual funds and they only charge the MER when you buy the item, but no recurring fee after that..
You gotz me confused, hun… :S
TD only charges MER when you buy a mutual fund? Huh? :S MER is an annual operating cost for the mutual fund, innit?
Two words for you: TD e-funds. Not sure if you know about it, but look into it if not. It's not something the branches will advertise, for obvious reasons…
TD charges the fee to purchase the mutual funds, but to clarify, what I meant was they don’t charge you an account fee as well.
I tried e-funds. They charged me $10/month for having the account open and under $25,000 even though they originally told me the threshold was $15,000. I switched everything over so I wouldn’t have to pay the monthly fee just to have money.
Plus, TD Mutual Funds has other funds like emerging markets that I can invest in.. that I did not see in the e-series.
Another thing to realize about RRSPs, which I just started to realize myself is that the advantage to RRSPs is not just that income/interest earned is tax-free until you take it out for retirement (and so allows for compounding interest), but also because the government returns the taxes you paid on your RRSP contributions, you can use that money to invest in, hence allowing your money to build even quicker today with money that still belongs to the government but needs to be returned to them later on in life.
All those graphs a person sees about how quickly RRSP contributions can grow won't apply unless you re-invest your return.
That’s true!
You have to really re-invest your returns or else you won’t see the full benefit of RRSPs. Good point.
Good idea to post this info. RRSP, TFSA, RESP, RRIF…it can get pretty confusing if you’re just foraying into those areas.
Couple points to add on to, re-phrase, or correct…
Rephrase – RRSPs = investment vehicle that delays paying tax on the money you have earned until you retire – the thought being you’ll be in a lower tax bracket at that point, and pay less tax. This is why a person will usually get a refund if they have some RRSPs he/she is claiming, because the government is returning the taxes you paid on the money you have invested in RRSPs.
TFSA – to add, that it is effective as of Jan 1, 2009, so as of this year, everyone who qualifies can put up to $10,000 in that tax shelter. I do have to point out a correction though. If I’m not mistaken, when you take out money from your TFSA, you cannot put the money back into it until the following year. So, if I take out $4,000 in June 2010, I cannot put it back until January 2011.
Another point to mention, there is some work done on TFSAs that show low income earners are better off using TFSAs as a retirement vesicle rather than RRSPs because of the nature of tax calculation. See: http://www.cdhowe.org/pdf/ebrief_91.pdf
Just some food for thought.
Canadian Saver mentioned that too (re: taking out the money and not putting it back in until Jan 2011)
I’ll have to ask if I ever decide to take the money out
Just as a clarificaiton. When you withdraw from the TSFA you lose that contribution room until Jan 1 of the next year. So if you have 10,000 right now in the TSFS and take out 8000 today to use, you can only replace the money on Jan 1 2011 along with the 5000 for 2011. Hope this makes sense.
Hi.. thanks for the post.. I commented on your bit about TFSA’s on my discussion forum… thanks again for the good details.
http://www.canadian-money-advisor.ca/threadview/2809.html
.-= Monty Loree´s last blog ..what is a life insurance annuity =-.
Thank you! This is just what I needed to read right now. Starting retirement savings is one of my goals for this year and I was leery of RRSPs. It sounds like a tax-free account is the way to go. But $5,000 a year for the next 35 years is going to give me about enough to live on for three or four years, tops 🙁