Two tax-effective ways to save for retirement

Date

October 25, 2023

Date

October 25, 2023

Date

October 25, 2023

Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) are both great tax-sheltered ways to save and invest.

The difference between the two lies in their tax treatment, but they are really mirror images of each other. With a TFSA you make the contribution in after-tax dollars, while with the RRSP you get a tax break now and pay the tax later. 

The RRSP advantage

When you make an RRSP contribution, you get the deduction (42.5 cents per $1 at the average tax rate) and the investment grows tax-free. You pay tax when money is withdrawn, often beginning at age 71 when RRSPs must be converted to a Registered Retirement Income Fund (RRIF). A RRIF is essentially an RRSP in reverse.  The rules require you to withdraw a certain amount each year so that Ottawa can get its tax back.

The TFSA advantage

A TFSA contribution is made with after tax dollars. There is no deduction, but the money grows free of tax and can be withdrawn free of tax. That’s why Wealthy Barber author David Chilton says TFSAs are the ‘Totally Fantastic Savings Account.’

TFSA’s were introduced in 2009 with a $5,000 limit that grows with inflation.  The contribution limit for for 2024 is $7,000.

Unused TFSA contribution room can be carried forward and any amounts withdrawn in the current year can only be put back in the following year. For someone who has never contributed and has been eligible for the TFSA since its introduction the accumulated room is $88,000 in 2023 and will increase to $95,000 in 2024.

RRSP vs TFSA

The RRSP and TFSA are registered accounts that can help Canadians reach their investment goals over the long term. However, which one is right for you is dependant on your age, life cycle stage and investment goals.  Either way, as we live longer and fewer among us can count on company pensions, personal saving must fill the gap.

This Globe and Mail article argues that some Canadians are putting money in an RRSP when a TFSA would be more well suited to their needs.

The article argues that young people are enthusiastic about TFSA. Even still, many may be over utilizing RRSPs at the early stage of their investment life. Young investors can look forward to a modest tax deduction when contributing to an RRSP. However, a contribution to a TFSA lets you wrap up any tax concerns from the beginning.

Harvest Portfolios Group ETFs are RRSP, RRIF and TFSA eligible and are growth oriented along with a dependable income streams in all business conditions.

Read more about Harvest Portfolios Group funds here.

Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.