As the February 29 registered retirement savings plan (RRSP) deadline draws near, a new survey from Edward Jones Canada finds nearly half of Canadians expect to make a contribution against their 2023 income.
Whether an RRSP is the best choice for your retirement investments from a tax perspective depends on individual circumstances. In some cases contributing to a tax free savings account (TFSA) can bring bigger savings. For investors with a longer-term view to retirement, the right combination of both can work wonders.
RRSP: save now, pay later
Canadians love to get their RRSP tax refunds in the spring but not all refunds are equal. RRSPs deliver the biggest tax advantage for wealthy Canadians because contributions can be deducted at the highest marginal tax rates.
That means someone with an annual income over $250,000, who is taxed at a combined federal/provincial marginal rate of 50 per cent, will lower their tax bill by half of their contribution.
At the other end of the income scale, someone who makes less than $50,000, and is taxed at a rate of 15 per cent, will only lower their tax bill by 15 percent.
In dollar terms, tax savings on a $10,000 RRSP contribution from someone in the top income bracket will be $5,000 compared with $1,500 for someone in the lowest.
RRSP investments can grow tax-free until they are withdrawn; ideally at a lower marginal rate in retirement. That’s why it’s important to target contributions toward high-income years when tax savings are high and take a pass on contributing when income is low.
RRSPs aren’t all sunshine and roses for the rich. If their RRSPs grow too much they will eventually be forced to make minimum withdrawals at a higher tax rate and even risk Old Age Security (OAS) claw-backs.
TFSA: pay now, save later
You won’t have that problem with a TFSA because contributions are not tax exempt in the first place. You can’t deduct contributions from taxable income but any gains made on the investments inside a TFSA (aside from dividends on foreign equities) are not taxed – ever. Withdrawals can be made at any time with no tax consequences.
In most cases, diverting RRSP contributions or refunds to a TFSA makes more sense for Canadians taxed at a lower marginal rate. There are RRSP contribution limits, (18 per cent of 2023 income up to $31,560), but unused space can be carried forward to future years.
The TFSA was originally intended as a short-term savings tool when it was introduced in 2008 and contribution limits were low. In 2024, the TFSA contribution limit for those who were 18 years or older when the TFSA was launched in 2009 has grown to $88,000, but it can vary among individuals depending on withdrawals made over the years.
Total allowable space is expected to grow in future years, making the TFSA a potential retirement saving dynamo.
RRSP and TFSA: the best of both worlds
Investors can avoid the risk of an RRSP expanding to higher withdrawal tax rates and OAS claw-backs by strategically shifting contributions to their TFSAs well before retirement.
Banking up a significant amount of cash in a TFSA allows retirees to top up needed cash without tax consequences, while keeping RRSP withdrawals in the lowest tax bracket.
Just about any investment is permitted in both the RRSP and TFSA – stocks, bonds, mutual funds, exchange traded funds – which presents an opportunity to use both as a single investment portfolio.
Consolidating retirement investments helps temper overall risk by diversifying across sector and geographic lines, and splitting asset between equities and fixed income.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
