Retirement Savings Options

RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts) are products designed as incentives to save. These accounts act as containers for your investments and, inside them, your money can grow and accumulate tax-free. Each account type works a little differently. 

RRSPs are a tax deferral program. You'll pay tax on your savings when you withdraw them in retirement. The idea is that you'll be in a lower marginal tax bracket in retirement than you are in your working years. However, that is not always the case. Other benefits include getting immediate tax relief by deducting your RRSP contributions from your income each year, and not having to pay tax on the money you make on your RRSP investments,  

"It all comes down to taxable income for the year, and does it make sense to drop money into an RRSP account," says Wealth Management Advisor Damen MacGillivray, "If you do it systematically throughout the year, it's not going to come back at the end of the year that you need to make a sizable deposit into your RRSPs to reduce your taxable income." 

There are limits on how much you can contribute to an RRSP each year. It is 18% of your earned income in the previous year, or the maximum contribution amount for the current tax year ($26,500 for 2019). If you don't have money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future. 

For the 2020 taxation year, the RRSP contribution limit would be a maximum of $27,230, and for the 2021 taxation year, the RRSP contribution limit is $27,830. 

"An RRSP, it reduces your taxable income for the year, and you defer the growth until retirement," says MacGillivray, "The goal of it is to deposit money into it when you're earning income at a high level and then withdraw money when you're at a lower income." 

You can carry forward the RRSP contribution room that you are unable to use in any particular year. You can carry unused contribution room ahead indefinitely - well, at least until you turn 71 years of age and can no longer have an RRSP account. 

The value of your RRSP may go down as well as up, depending on the investments it holds. You can open an RRSP at any age as long as you have earned income and file a tax return. You must close your RRSP when your turn 71, and withdraw your savings in cash, convert your RRSP to an RRIP (Registered Retirement Income Fund) or buy an annuity. 

TFSAs are not strictly for retirement savings – you can also use them for any savings goal. TFSAs are flexible, as withdrawals can be made at any time and are tax-free because you made the contributions with after-tax dollars. You can continue to contribute to a TFSA at any age, and contributions cannot be deducted from your income tax return.  

"It's an account that should be utilized by every single person in this country because it's the only account the government gives you that you don't pay income tax on," says MacGillivray. 

The TFSA contribution limit for 2020 is $6,000. The total room available in 2020 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009 is $69,500. 

"The only difference (between RRSPs and TFSAs) is the taxable consequences on them. People get confused, thinking that investment from an RRSP is different than a TFSA, and that's not the case," adds MacGillivray, "What you shelter inside that account is the difference." 

MacGillivray also recommends maxing out your TFSA, stating that having non-registered money when your tax-free is a disservice.