If you’re like me, you have recently been inundated with ads all over the internet shouting at you to contribute to you RRSPs by March 1st. YouTube ads for RRSP contributions was a first for me. Ads exclaim that everyone should open a TFSA and RRSP right now, don’t hesitate! What does any of it mean? What does it mean if you have no emergency savings, no retirement accounts and possibly no budget in place? How could any of this apply to you? Well if you break it down, it is a lot easier to wrap your head around and you may even be able to take advantage of some of the benefits!
So what’s the deal with TFSAs, RRSPs and your taxes?
First off, the ads commenting on RRSPs and TFSAs know nothing about your finances and taxes. It is much better to consult a financial planner or a tax advisor if you had any questions. Many young people believe they don’t deserve professional financial advice until they have significant resources. This is simply false- there are many financial planners who work with millennial clients. (Check out XY Planning Network Canada for more information!)
RRSPs, registered retirement savings plans, were first introduced in 1957. You can contribute to your RRSP to reduce your taxable income which normally results in a tax refund. RRSP-held securities which earn interest, dividends and capital gains that do not trigger tax, so there’s lots of growth potential. Thinking much farther down the road when you withdraw from your RRSP once retired, you are now in a lower tax bracket and thus will expose you to lower taxes.
You may be hearing more about RRSPs as you follow in your parent’s financial planning footsteps. Though RRSPs do have their place, financial plans aren’t one size fits all. Some of the fundamentals are the same but your circumstances definitely different. The main example is what we’re discussing today- TFSAs. TFSAs or tax free savings accounts were introduced in 2009 as an alternative to RRSPs. Unlike RRSPs, TFSAs have no upfront tax deduction and shield ongoing investment income. Any income earned will never be taxed and the funds are readily available for withdrawal (depending on how it is invested) at any time. They also accumulate contribution room so if you’re over 18, and you haven’t opened a TFSA, you can contribute a maximum of $57,500. Assuming you aren’t in the top tax bracket, prioritize your TFSA since you can always carry forward RRSP contribution room to future years.
As I think back to the ads I was seeing, I have to say they were somewhat effective. They can serve as a prompt for you to learn more about RRSPs and TFSAs and decide what you should prioritize when figuring out your finances. If you feel as if you should be doing something differently or are just starting out, don’t hesitate to contact a financial planner for tax planning advice.
Check out XY Planning Network Canada today: www.xyplanningnetwork.ca