(NC) As tax season quickly approaches, many of us are re-evaluating our finances and looking for the best place to put our money. RRSPs and TFSAs are two popular investing options that can help grow your savings. But what’s the difference, and how do you choose the right one for you?
We asked Jenny Diplock, Associate Vice President, Personal Savings and Investing at TD, to share key information and differences between the two.
Tax-Free Saving Account
When to use it: A TFSA is designed to help you save for both long-term and short-term goals – this includes big ticket items like a new home, vehicle, travel, a wedding or your retirement. A key benefit of a TFSA is that your savings grow tax-free.
Withdrawals: All withdrawals are tax-free and re-added to your contribution room at the start of the following year.
Contributions: Unlike an RRSP, TFSA contributions are not tax-deductible. The amount of money you’re allowed to contribute is based on an annual limit set by the Federal Government; in 2020 it’s $6,000. If you withdraw money one year and want to put it back in the same year, you’ll need to make sure you have contribution room left for that year, otherwise you’ll have to wait for the following year. If you contribute more than your limit, you’ll pay a penalty of 1 per cent per month on the excess amount. You can confirm your total contribution limit with the CRA.
Registered Retirement Savings Plan
When to use it: An RRSP is designed to help you save for retirement. Contributions are deposited pre-tax, which means you only pay tax when you withdraw your funds. And RRSP contributions are typically tax-deductible.
Contributions: The amount of money you’re allowed to contribute is based on your earned income. The 2020 limit is up to 18 per cent of your annual earned income to a maximum of $27,230 (the 2019 maximum is $26,500), subject to any pension adjustments plus any unused contribution room from past years. And you won’t pay any taxes on this money until you withdraw it.
Withdrawals: Since RRSPs are designed for long-term saving, withdrawals are subject to tax. However, under the Home Buyers’ Plan, first-time homebuyers can withdraw up to $35,000 (or $70,000 for a couple) to finance a down payment, subject to eligibility and conditions. The withdrawal is tax-free but must be paid back into your RRSP within 15 years.
How do I decide?
There is no one-size-fits-all approach. If you’re unsure, Diplock suggests speaking to an advisor who can help you assess your options.
3 things you need to know for RRSP season
(NC) A Registered Retirement Savings Plan (RRSP) is one of today’s most commonly used savings vehicles, in large part because contributions are tax-deductible and the product is designed specifically for retirement.
You’ll have until March 2, 2020 to contribute to your RRSP and claim the amount on your 2019 tax return. Any contributions made after this deadline will count towards the 2020 tax year.
RRSP season is a great opportunity to review your finances and decide if you want to make any adjustments or set up automatic contributions for the upcoming year.
With the 2019 deadline fast approaching, here are some tips from TD:
New year, new rules: Every year, there are new contribution limits, deadlines and other changes. For example, in 2020, first-time homebuyers can now withdraw up to $35,000 (or $70,000 per couple) from an RRSP to finance a down payment on a home, subject to eligibility and conditions. This withdrawal is tax-free but must be repaid into the RRSP within 15 years. Before taking out any money, speak to an advisor or financial planner to see if this program is appropriate for you.
Contribute carefully: Understanding how much to contribute can be confusing. In 2019, each Canadian has a personal RRSP contribution limit of up to 18 per cent of their earned income, up to a maximum of $26,500 plus any unused contribution room from past years. However, those belonging and contributing to an employer’s pension plan may have reduced limits for their RRSP. It’s important to keep track of all your contributions to ensure you stay within your annual limit.
Withdraw wisely: RRSPs are typically set up to support long-term savings and retirement. Since RRSPs are designed for long-term saving, withdrawals are subject to tax. However, under the Home Buyers’ Plan, first-time homebuyers can withdraw up to $35,000 (or $70,000 for a couple) to finance a down payment, subject to eligibility and conditions. The withdrawal is tax-free but must be paid back into your RRSP within 15 years. Speak with an advisor or financial planner before withdrawing any funds to ensure you understand the implications.
Understanding RRSPs to get the most out of your tax refund
(NC) Many of us use Registered Retirement Savings Plans (RRSPs) because it helps us save for the future while reducing our annual taxable income. Whether you have one set up or are thinking about opening one, Lisa Gittens, tax expert from H&R Block, shares some things to know.
Beat the deadline. You can contribute to your RRSP every year, but there’s a deadline you need to meet and it’s always 60 days after the end of the year. The money you put in will be deducted from your overall taxable income from that year, so make sure you contribute on time – by March 2this year.
Know your limit. Your contribution limit is based on several things, including your earned income for the past year and any unused contribution room from previous years Check your Notice of Assessment from last year to see how much contribution room you have. You can exceed your RRSP contribution limit by up to $2,000 without being subject to a penalty.
Check your contribution room. RRSP contributions can be carried forward if you think you might be in a higher tax bracket in future years. “This will help maximize the tax deduction and reduce your tax bill later,” explains Gittens.
Withdrawals are considered income. Money withdrawn from an RRSP is considered income in the tax year it was received, so you’ll have to add it to the other income you earned during the year on your return. Depending on the amount, 10 to 30 per cent is taxed at the source, but that’s usually not enough to cover the total tax you would owe when it’s declared as part of your income, so keep a few extra dollars handy to cover this, should it arise.
“Remember, RRSPs have no minimum contribution and every little bit helps,” Gittens adds.