In the early days of each year the financial community is abuzz about TFSA and RRSP accounts. Rallying cries such as: New contribution room! Deadline approaching! Tax advantages! Save for retirement! echo across the internet.
What are these registered accounts, and why should you use them for your investments? Here is our no-nonsense guide to TFSAs and RRSPs. As for how you should use them, that depends on your unique situation, and should be addressed with a financial advisor (but may we suggest that whichever account you choose, there are shares and bonds you can purchase that do good for the world while delivering good financial returns).
Both RRSPs and TFSAs are registered accounts, with maximum contribution limits each year. Investments held in these accounts grow tax free. You can hold many types of instruments in these accounts – cash, GICs, mutual funds, ETFs, even bonds and shares that support renewable power!
So what is the difference?
An RRSP (Registered Retirement Savings Plan) provides two benefits. When you make a contribution you can deduct that amount from your taxable income, helping you pay less tax immediately. As the investments sit inside your RRSP, they grow free of tax. However, when you withdraw the money from your RRSP (or RRIF it has been converted to) it will be taxable.
Your maximum RRSP limit is 18% of your earned income for the year, up to a maximum value determined by the CRA. If you don’t maximize your contribution, the unused room is carried forward to future years. If you haven’t maximized your RRSP contributions, doing so will not only allow investments to grow tax free, but it will provide a big tax savings in the year you contribute!
RRSPs must be converted to another type of account when you turn 71. At this point you will face minimum withdrawals based on a schedule aligned with your age.
A TFSA (Tax Free Savings Account) works in the opposite way. You don’t get a tax deduction for TFSA contributions, but withdrawals will not be taxed. Like the RRSP, investments in a TFSA grow tax free.
The amount you can contribute to your TFSA is the same for everyone, and is determined by the CRA (Canada Revenue Agency). In 2018 the contribution limit is $5,500. If you don’t maximize your contribution, the unused room is carried forward to future years. The cumulative total, adding up all the contribution room since TFSAs were introduced in 2009, is up to $57,500. This means that if you haven’t contributed this much to your TFSA yet, you can make a large contribution and take advantage of tax free growth.
An additional benefit of TFSAs is their flexibility. You can withdraw money from a TFSA at any time and put it back in future years, penalty free. TFSAs also have no time limit. Unlike an RRSP, which you have to convert to another account type when you turn 71, you can hold a TFSA as long as you live.
How do I choose?
Which vehicle is the best way to save for your future? Everyone is going to have a different answer based on their lifestyle, current investments, and financial goals. Consider your options carefully, discuss them with a financial advisor if you need another opinion, then start taking advantage of these accounts.
What does CED Co-op offer?
All of our investments can be held in RRSPs and TFSAs by creating an account with CWCF (Canadian Worker Co-operative Federation). You can invest by making a new contribution (within your current limit), or by transferring existing registered investments to CED Co-op. Contact us if you are interested in transferring existing registered investments. We can work with you to ensure doing so doesn’t affect your withdrawals or contribution room.
Whether your investments are non-registered, held in a TFSA, or in an RRSP, you can always use them to support clean, green energy while earning strong returns.