When you’re thinking about your financial future it’s important to consider risk. There are your typical risks, like the risk of losing money with investments, the risk of passing away unexpectedly, or the risk of not being able to work for an extended period of time. These are all common risks we need to plan for.
But there are also other risks too, ones that many of us might not include in our plans. These risks are less common, more speculative, but can be just as damaging. Risks like changes to government benefits, increasing tax rates, or changes to tax-advantaged accounts like the RRSP and the TFSA.
Based on age alone, the TFSA is relatively young, it’s barely entering the double digits. Although it was only introduced in 2009 it has already experienced a few dramatic changes during that time.
Anticipating changes to tax-advantaged accounts is an important part of any financial plan. A good plan should have enough room to absorb a few of these unexpected changes without causing major stress.
To ensure your plan is robust you need to anticipate these changes and understand how they might impact your plans.
In this post we’re going to speculate on a few ways that the TFSA could change in the future. This is pure speculation but it’s a good exercise to understand what changes might be possible in the future and how your plan can absorb them if they were to actually happen.
It’s getting to be that time of year again. Time for taxes, time for RRSP contributions, and time to debate whether a TFSA contribution or an RRSP contribution is the best choice.
RRSP season naturally creates this question for many people. Is an RRSP contribution really the right choice? Or would a TFSA contribution be better?
Unless you’re fortunate enough to be maxing out both accounts, the TFSA vs RRSP decision has been an annual conundrum since the introduction of the TFSA in 2009. If you’re not well versed in the differences between the TFSA and the RRSP, read this intro to the TFSA and this intro to the RRSP to get a better sense of the differences.
The TFSA and the RRSP two of the main tax advantaged retirement accounts in Canada. You can use one, the other, or both to save for retirement.
Using the TFSA alone can be enough for a luxurious retirement, one that is 100% free of taxes. However, in certain situations, the RRSP can provide A HUGE benefit by lowering your lifetime tax bill.
Which one you use depends on your situation, and not just your situation now, but also your situation in retirement. To make the decision even more complex there are also some soft benefits that can help push you toward the TFSA or the RRSP when all the other factors are equal.
Deciding between the TFSA or the RRSP can be tough. Making the right decision could be worth $10,000’s to $100,000’s. If you feel like you need help then please reach out to us. We help clients optimize their taxes and benefits, and choosing between the TFSA and the RRSP is an important consideration. A financial plan from a fee-for-service planner can easily save you thousands of dollars and also make these tough financial decisions much easier.
This TFSA vs RRSP guide takes a financial planner’s perspective on the decision between a TFSA and RRSP. Learn how to make the TFSA vs RRSP decision just like a financial planner would. Look at all aspects of the decision, not just taxes, not just government benefits, but everything.
Here’s how to make the TFSA vs RRSP decision like a financial planner. Each factor is important, but the weight you give each one depends on your own situation and goals.
When it comes to retirement there is a lot of focus put on the RRSP. The Registered Retirement Savings Plan seems like an obvious choice for retirement (it even has retirement in the name after all!). But for many of us an RRSP isn’t necessary, and it might even be counterproductive!
There’s a new retirement account on the block and it’s called the TFSA. Not even 10 years old, the TFSA is relatively new to the retirement savings game. Starting in 2009, it changed the way we look at retirement savings.
If you’re new to RRSP vs TFSA debate it’s important to know that there are pros and cons for each account. RRSP’s do have the advantage in a few different areas, especially if you have high income or have a family and receive child benefits (either the Canada Child Benefit or a provincial child benefit). TFSA’s also have their share of benefits too. For low and middle income households, the TFSA has a few big advantages.
When deciding which is the right one for you need to look at multiple factors. Factors like income taxes, government benefits, creditor protection, and even human behaviour.
When deciding between the TFSA or the RRSP the key thing to remember is that you don’t actually NEED an RRSP to retire. Someone can easily retire with only a TFSA.
There are four things you need to know if you’re going to avoid the RRSP and only use the TFSA for retirement…
Financial independence is a goal for many people. Financial independence is when work becomes optional. It’s when your investments are large enough to support your annual spending indefinitely, without the need for employment income. Reaching financial independence frees you from the typical work/money/time equation. When you reach financial independence you no longer have to trade your time for money.
How much you need to reach financial independence is different for everyone, but the quick and most common metric is 25 times your annual spending. Once you reach this level of savings and investments (not including your home) you can withdraw 4% of your portfolio indefinitely. With the right portfolio your investments will grow enough each year to pay you 4% of the original principal and still keep up with inflation.
Taxes are obviously a big consideration when growing your investments. Tax free growth allows your investments to grow faster and lets you hit your goals earlier.
In Canada we have two main accounts that provide tax free growth, the TFSA and RRSP. With the TFSA you pay tax now but don’t pay tax later. With the RRSP you don’t pay tax now, but you do pay tax later. Regardless of when you pay the tax, the investment growth within an RRSP or a TFSA is tax free. Using your TFSA and your RRSP to its full potential means you can hit financial independence much faster.
Both TFSA and RRSP are great, but they’re also different. These tax-advantaged accounts each have their own pro’s and con’s.
If you only have a set amount to invest each month, it’s important to pick the “right” account.
The “right” account can change over time as your income and personal circumstances change.
Each account, TFSA vs RRSP, deals with taxes differently. Choosing the right account will help you save $100,000+ in tax over your lifetime. Who would say no to $100,000?!?
By choosing the right tax-advantaged account, you can actually save less each month and still achieve all your financial goals.
Tax-Free Savings Accounts (TFSAs) are relatively new. They were introduced in just 2009. Even though they’ve only been around for a short time they’re already the most used out of the major tax-sheltered accounts. There are over 5.5 million households in Canada that have an active TFSA account.
(Authors Note: I love it when people use their tax-sheltered accounts. Good tax planning is a key component of any financial plan and can add $100,000’s to your net worth)
The average usage rate for the TFSA is pretty impressive at 40.4%. This is relatively consistent across both age and income. The highest usage rate is in Ontario where over 45% of the households are using a TFSA. The median contribution to a TFSA in 2016 was $5,765.
All-in-all these are impressive numbers for a new tax-sheltered account.
Given the high usage rate the TFSA must be pretty great, right?!?!
In this post we’ll cover exactly how a TFSAs works, the benefits of a TFSA, as well as some of the drawbacks of a TFSA.