Hello again everyone, it is your favourite financial superhero MOLSON MONTGOMERY.
Today I wanted to speak briefly about TFSAs and RRSPs and how I like to use them for my clients; when they make sense and when they don’t.
Full disclosure, I am team TFSA all the way over Individual RRSPs. I believe Individual RRSPs are the best way to pay even more tax than you were supposed to the government. Some people may want to pay more taxes, however, I am not one of them.
Instead, I guide a lot of my clients toward the TFSA. The contributions limits are much easier to understand, you can have access to the money without penalty, you can get an aggressive rate of return and the whole shebang is tax-free.
Have I caught your interest? If so, there are a couple of things to consider about TFSA accounts:
Annual Contribution Limits are $6,000 (currently)
You can open a TFSA at the age of 18
There is a carry-over provision to a TFSA (so every year after the age of 18, your total contribution amount grows if you haven’t used all the room)
Example: Annual Contribution Amount; Age 18- $6000, Age 19- $6,000, Age 20- $6,000
If you contribute $3000 in year one, $3,000 in year two and $1,500 in year three, you have contributed $7,500 to your TFSA. This means you have $10,500 of room still left inside your TFSA
Your principle is the only thing the CRA counts.
If you contribute $10,000 and your fund grows to $100,000 (I wish) then the CRA only identifies the $10,000 as your contribution
It is ALL tax-free!
If you contribute $10,000 and your fund grows to $100,000 (YAHOO!!!) then the whole kit n kaboodle is TAX-FREE
Now is there EVER a good time to put money into an RRSP? There is one condition which makes contributing to an RRSP an absolute no-brainer: when the RRSP is a Group RRSP with Matching. If you can work for an employer who will take your 5% investment and match it with 5%, that is a massive tool to have in your financial quiver. There is not an adviser in this world who can beat free money, no matter how good they think they are.
So, why am I so hard on the most used financial tool in all of Canada? Well not to get too negative on RRSPs, but:
Once that money is in the account, you pay a penalty to take it out until you turn 55, and on top of the penalty, you pay income tax on it in your tax bracket.
As soon as you turn 71, the government forces you to withdraw an amount that is of their own choosing
It affects your tax bracket during retirement, a time in which you are no longer making an income and need all the tax-efficient planning you can get
If you pass an RRSP onto your children, they take on the tax burden of that money.
You get a deduction on my taxes, but every cent that comes out of an RRSP during retirement is taxable
I have no control over how the government changes the rules.
If I have too much invested in RRSPs, it can affect my other pensions in retirement (Clawbacks on CPP & OAS)
Now look, I am being harsh on the Individual RRSP, and I am sure in some ways it isn’t fair, however, when speaking to clients I always tell them that with any investment tool, where there is a gimmie, there’s a gotcha and if the gimmie outweighs the gotcha, well you’re in business. For me, the downside of Individual RRSPs are just too steep a price to pay for the benefits.
If you have any questions, concerns, or comments, please feel free to reach out!
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