RRSPs, TSFAs: Two Ways to Grow Savings ASAP
February 27, 2012
While it’s never too late to start saving for your future, it’s even better to get a head start. Whether your goals are short term, long term, or undecided, it’s a good idea to have money put away, even better if it can gain interest and ideal if it can offer you tax benefits. Two great ways to encompass all of these are Registered Retirement Savings Plans (RRSPs), and Tax-Free Savings Accounts (TFSAs). Instead of trying to figure out which account is best for you, you should be trying to figure out how you can make these accounts work together for the best results.
An RRSP is an investment that is registered with the government and is meant to defer taxes on your retirement savings. This means that the contributions you make to your RRSP annually are deductible from your income. These taxes are deferred until the money is withdrawn when you retire (often when you are in a lower tax bracket). There is a maximum amount you can contribute each year and this amount can be found on the Notice of Assessment you receive from Canada Revenue Agency after filing your taxes. Lastly the overall goal for your contributions is that money saved in an RRSP can grow faster than money saved outside of an RRSP.
The Tax-Free Savings Account has similar benefits but kind of works the opposite way. Each year Canadians can contribute up to $5,000 into their Tax-Free Savings Account. The amount contributed is not tax deductable but the interest gained in this account will not be taxed upon withdrawal. Another appealing factor is that the money in this account can be withdrawn at any time without penalty. Like an RRSP if an individual does not contribute the full allowable amount any given year the remainder carries over to the next year.
So while these accounts do differ from one another they both offer tax benefits and a safe haven where your money can grow. TFSAs are taxed going in and RRSPs are taxed coming out. So contributing to both means you can receive a tax break on some of your contributions now, and a tax break on some of you savings later. It is important to speak to a financial advisor about your lifestyle and goals to figure out how to maximize the benefits these two options, but used properly together they offer average Canadians good tax strategies.
For more information and advice on how you can make RRSPs and TFSAs work best for your life contact a Libro Coach today.