I was reading articles on The Globe and Mail like I usually do but one article caught my eyes particularly. It read “Encourage seniors to delay retirement, growth council tells Morneau”. JSYK: This article was published two days ago, not two decades ago. My initial reaction was DANGGGG. Finance Minister Bill Morneau is open to the idea that Ottawa should encourage seniors to stay in the work force. Plus, one of the recommendations was to increase the eligibility age for both Old Age Security and the Canada Pension Plan. VOMIT! Another one was to increase the retirement age so that Canada falls in line with international trends as governments adjust to the fact that people are living longer. More Vomit! I don’t know about you but I surely don’t want to be working as a nurse when I am 65. OMFG! Just the thought of working when I am 65 made my skin crawl. Or, any kind of profession if I do change my profession in the next five or ten years. If you are reading this and thinking – Well, what if I have no other option than to work at 65, start to take control of your financial life TODAY. Save more and spend less, DUH!
However, Canadians are perplexed and need help when it comes to saving for their retirement. There are two savings accounts for Canadians (I should say “Us Canadians”, I am a proud Canadian xoxo. Just incase). The first one is Registered Retirement Savings Plan (RRSP) and the second one is Tax-Free Savings Account (TFSA). Full Disclosure: I prefer TFSA to RRSP. Please be aware there are several differences between a TFSA and a RRSP. Also, both can be used as investing accounts as well. In fact, I want to make a plea to all my readers to use both as investing accounts instead of just holding cash. Here’s another confession: I have not opened up a RRSP yet.
K, let’s dive in. What exactly is a RRSP? First off, RRSP was introduced back in the 1950’s to promote savings for retirement. As mentioned earlier, it is a type of saving account where you can hold cash, GIC’s, mutual funds, index funds, stocks, bonds and ETF’s. Likewise, when you contribute to your RRSP account, you don’t pay any tax as it is counted as a tax deduction. For instance, if you make $80,000 a year and contribute $10,000 into your RRSP, you will only pay tax on $70, 000 instead of $80,000. However, when you retire you will be taxed on the $10, 000 that you contributed to your RRSP when you cash it out. Well, hopefully, the $10,000 is $55,000 when you retire as a result of the magic of compound interest. The main idea is to contribute towards your RRSP to take advantage of the tax deductions when you are at a higher tax bracket, and take it out when you are in a lower tax bracket. Most Canadians usually make less when they are close to retirement. So, it makes sense to cash out your RRSP and pay a lower tax rate. One of the drawbacks of the RRSP is that when you put your money in, it stays there until retirement. Unless, you want to use the money for the Home Buyer’s Plan ($25,000 max) and Lifelong Learning Plan ($10, 000/year and $20,000 total max). Other than the two options I just mentioned, you cannot take out your money from your RRSP penalty-free. Most Canadians take this penalty as a drawback but I believe this is awesome as Canadians are forced to be disciplined and save until retirement. Sadly, there was an article on CBC this morning that stated 38% of Canadians dip into RRSPs early. UGH! Lastly, a RRSP is tax-sheltered meaning you don’t pay tax on the income earned inside the account.
Now, what is a TFSA?
TFSA is awesome and my BFF. Akin to RRSP, TFSA is another type of saving account where you can hold cash, GICs, mutual funds, stocks, index funds et cetera. Personally, I have been investing with TD Bank’s e-Series index fund (Fund code – TDB900) for almost seven years now. Yes, under my TFSA. Like I always say, I cannot predict the stock market but my fund has been doing great so far. One of the primary reasons I would say is due to the low MER on the fund. Just to tease the 5 big banks of Canada like always, please remember all banks are in the business of generating revenue through selling borrowing and investing products. Don’t forget banks’ primary objective is to make money for the shareholders, not to help their customers. Monthly account fee? Anyone? 19.99% interest on credit cards? 0.05% interest on savings account? YUCKK! Anyways, I get both sides as a customer and as an investor. I have said this before; I am pissed as a customer. However, as a shareholder, it’s a different ball game. I smile as I collect my dividends at the end of the year and it’s been increasing every year for the past 6 years. Please forgive me for the little rant. Now, the biggest difference between a TFSA and a RRSP is TFSA has no tax deduction when you contribute. However, when you cash out, you get a tax break, which is my darling. In fact, one of my favourite personal finance columnist states TFSAs are your ticket to a TAX-FREE $1 – million. A couple of more points about TFSA. TFSA started in 2009. Currently in 2017, if you have never opened a TFSA, you can contribute up to $52,000. CRA does a great job of explaining your contributions towards TFSA here.
Which one do you choose? TFSA OR RRSP? Unfortunately, the answer is it depends on your personal situation. But, the general rule of thumb is to take advantage of the tax deductions if you are in a higher tax bracket and contribute to your RRSP. If you are a student just starting out, contribute to your TFSA. As much as I prefer TFSA, I plan to start contributing to RRSP in a couple of years. But, if in any doubt, I would say stick with TFSA. You cant go wrong with TIF SAS. What do you think? What are your thoughts?