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RRSP or TFSA? Tuck money away into both if possible, experts say

Posted on February 18, 2013 at 11:45 AM Comments comments (48)
CALGARY — It’s the battle of the acronyms — RRSP or TFSA?
 
They’re both savings vehicles that can help with your tax bill, but which one reigns supreme will depend on your own individual situation.
 
In ideal circumstances there would be no showdown — Canadians would sock money away into both, experts say.
 
But circumstances aren’t always ideal.
 
“Maybe it’s a quality of life decision or maybe it’s truly just there is not the availability of income or assets to contribute to both,” said John Tracy, senior vice president of retail, savings and investing at TD Canada Trust.
 
“Both is a great answer when you can do it.”
 
An RRSP — a registered retirement savings plan — is, as its name suggests, meant for retirement. Funds can be withdrawn sooner — under the Home Buyer’s and Lifelong Learning plans, for example — but generally this is money that won’t be touched until your golden years.
 
TFSAs — tax-free savings accounts — are more flexible. They can be used to save for retirement, to be sure. But because that money is easier to access in a TFSA than it would be in an RRSP, it can serve many other purposes.
 
“It’s starting to pick up a lot more popularity with the younger generation who is not quite geared to thinking about the retirement,” said Cleo Hamel, a senior tax analyst.
“They’re more along the lines of thinking of today and what they have planned in their own life — getting married, buying a home.”
 
You can find out how much you are allowed to contribute to your RRSP on last year’s notice of assessment from the Canada Revenue Agency — 18% of that year’s income to a maximum of around $23,000. Unused contribution room from previous years gets carried over.
 
The deadline for making a contribution for the 2012 tax year is March 1, so it’s really the only option Canadians have available now to ease last year’s tax bill — RRSPs give the immediate benefit of a tax deduction.
 
Because there’s a penalty for withdrawing from an RRSP before retirement, tapping those funds is really a “last resort,” said Tracy. Another deterrent is that once that money is withdrawn, that contribution room is gone for good most of the time.
 
“In some cases, it makes more sense to borrow money than access your RRSP because the penalty in tax would be so significant,” he said.
 
From a psychological standpoint, the difficulty in withdrawing from an RRSP can be a good thing for those keen on letting their retirement savings grow.
 
“I think for real retirement savings, feeling like you’ve locked it in a bit more in RRSPs and leaving it there and letting it compound for a longer period of time can really be quite beneficial,” said Dennis Tew, chief financial officer at Franklin Templeton Investments Corp.
 
On the other hand, you can take out money from your TFSA any time without being dinged by the tax collector and that contribution room is restored the following year.
The deadline for contributions is the end of the calendar year, so that ship has sailed when it comes to 2012. For 2013, the limit for contributions has moved up from $5,000 to $5,500 to account for inflation. Like with RRSPs, spare contribution room from previous years is available in the future.
 
Whether it be an RRSP or TFSA, the money contributed can be invested in mutual funds, stocks, bonds and GICs.
 
Since RRSP funds are taxed upon withdrawal and TFSA contributions are not, it’s also helpful to think about whether or not you foresee yourself being in a higher or lower tax bracket when you use that money than you are today.
 
Another factor to consider is what effect RRSP funds will have on Old Age Security, the Guaranteed Income Supplement and other government benefits. At times, it might make sense to divert some money into a TFSA.
 
RRSP or TFSA — whichever one Canadians pick, Tracy said the most important thing is that they do something.
 
“Create a habit of saving. Start small. Don’t get overwhelmed,” he said.

RRSP pitfalls to avoid

Posted on February 18, 2013 at 11:41 AM Comments comments (63)
 
(Special) - While the Registered Retirement Savings Plan (RRSP) is a great vehicle to help Canadians save for their retirement, there are some pitfalls that investors may not knowabout and should try and avoid.
 
Many people, forexample, confuse their contribution limit with the deduction limit.
 
The deduction limit isset at 18 per cent of your previous year's earned income, up to a dollar limit,which changes every year. The maximum dollar limit for the 2012 tax year is$22,970, up from $22,450 in 2011, and will rise to $23,820 in 2013. It iscontained in the Notice of Assessment that you get each year from the CanadaRevenue Agency after you have filed your return.
 
If you have not beencontributing the full amount to your RRSP and have unused contribution room,your contribution limit could be higher than the deduction limit. If, forexample, you have $20,000 of unused contribution room from previous years, youractually contribution limit for 2013 could be $43,820, your 2013 deductionlimit plus your past unused contribution room.
 
Another pitfall can besaving too much in your RRSP and having too many accounts.
 
An RRSP of between$700,000 and $2 million, for example, may sound great, but that money will betaxed at some point. A retiree with such a large plan would be in the 46 percent tax bracket and would have their Old Age Security (OAS) clawed back.
 
Having your financialassets spread over several plans can lead to a disorganized investment strategy,duplication, inappropriate asset allocation and paying more fees than if allinvestments were consolidated in one account.
 
Waiting to the lastminute to make your contribution is another common pitfall. It can lead tomaking emotional decisions or parking the money for too long on the sidelines.By contributing early or making regular contributions during the year you getthe tax-sheltered returns starting sooner and get the advantages of dollar costaveraging.
 
Many people may notrealize they have a choice when they can actually claim their RRSPcontribution. You don't have to do it in the same year that you actually makethe contribution.
 
"If your incomeis below $45,000 one year but you expect it will go up the next year, you canmake the contribution but then wait until the second year to actually claimit," explains Myron Knodel, director of tax and estate planning withInvestors Group. "In this way you would get a greater tax break from yourcontribution because you are claiming it in a year when your income ishigher."
 
Many people also maybe investing in the wrong things in their RRSP.
 
The advantage ofinvesting in registered accounts such as RRSPs and Registered Retirement IncomeFunds is that the money is only taxed when the funds are withdrawn. When youtake money out of your RRSP at 71, you are taxed at your marginal rate at thetime, which is usually lower than when you were working full-time.
 
As a general rule,it's better to invest in fixed income in your RRSP and equities outside of yourRRSP in a non-registered account.
 
You can claim acapital loss from equities if they are in a non-registered account whereas youcan't if they are in a registered plan. And capital gains made on equities heldin a non-registered account are taxed at only 50 per cent of the individual'smarginal tax rate.
 
Consequently,non-registered accounts generally should contain equities and dividend payingstocks instead of interest-bearing investments such as Guaranteed InvestCertificates and bonds which should be in your RRSP.
 
Don't withdraw yourmoney from your RRSP early because it is taxed very heavily and try to takeadvantage of both your RRSP and the Tax Free Savings Account (TFSA).
 
Although the TFSA wasintroduced five years ago, a recent BMO Bank of Montreal survey found that fewer than half ofCanadians have been making the maximum contribution of $5,000 a year. Themaximum contribution this year is going up to $5,500.
 
"Look at whatyour tax rate is now and what you expect it to be when you retire," Knodeladvises. "If you expect your marginal rate will go down when you retireit's better to make contributions to your RRSP and take the tax refund andreinvest it. If you are not saving for retirement a TFSA is usually preferableto an RRSP because you can remove money from it tax free but funds removed fromyour RRSP is taxed when removed. "
 
Talbot Boggs is aToronto-based business communications professional who has worked with nationalnews organizations, magazines and corporations in the finance, retail, manufacturingand other industrial sectors.
 
Copyright 2013 TalbotBoggs
 

New Blog Page Added to our Site

Posted on February 18, 2013 at 11:28 AM Comments comments (54)
I will be adding interesting news items and tax information I find in the media. Some of these will have different relevance to different people. I may also add my own comments about the articles. If you have any comments of your own pleaase feel free to add them.
 
Randy
 
As these articles are from various media sources, we at Neepawa Income Tax can not take responsibility for any opinions, other than our own. As tax professionals only, we are not certified to provide any investing advise.Before making any investment decisions, please discuss them with a professional.

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