Choosing between the RRSP and TFSA

Still trying to decide between investing in your RRSP and your TFSA?  You are not alone; there is still a lot of confusion out there regarding the benefits of investing in a Tax Free Savings Account (TFSA) vs a Registered Retirement Saving Plan (RRSP). 

The RRSP is essentially a tax deferral strategy, meaning investors put off paying the tax on their income until a future date; usually during retirement when they are earning less money and are therefore in a lower tax bracket.  When you invest in an RRSP you get a tax deduction which could result in a refund of tax you paid during the year.  The amount you can invest is based on your income; 18% of the previous year’s income, this amount can be found on your tax assessment.  You can carry forward any unused room indefinitely and use it in future years when you have extra cash to invest or to shelter a lump sum payment like a bonus or severance package. 

The ultimate goal for your RRSP is to provide you with income once you decide to stop working, this is becoming more and more important as many companies are reducing or eliminating their pension benefits.

The TFSA is also a registered account and therefore lets investors grow their money and pay no tax on investment income earned.  However, investors will not receive a tax deduction or refund when they invest in a TFSA, instead all money can be redeemed from the account tax free regardless when and how much is withdrawn.  Furthermore, unlike the RRSP; you do not lose your contribution room if you redeem money, the only catch is you have to wait until the following year to re-contribute otherwise it may be counted as a double contribution and result in a penalty.   The TFSA was created in 2009 and the contribution amount is the same for everyone; it started at $5000/year and has been indexed to $5500 for 2013/14.  Currently the total allowable contribution amount is $31,000, if you are not sure how much you can contribute; the amount will be on your tax assessment.

In most cases, if you are earning over $30,000 in income, need some tax relief and don’t need the money for a specific purpose, I would suggest investing your extra cash into an RRSP.  If you are saving for something specific like a car or vacation; the TFSA would be a better option.  In addition, for those that have maxed out their RRSPs and are continuing to save the TFSA is an excellent investment vehicle.  The money can still be used for a specific purpose, emergency fund or additional retirement savings. 

If you are still having trouble trying to decide, or have any questions, give me a call.

Have a great weekend,

Tracey

Budget 2014 - Overview

As you may know, Finance Minister Jim Flaherty delivered his federal budget on Tuesday this week in Ottawa.  In case you haven’t had a chance to review the media coverage, I thought you would appreciate a quick overview.

Unlike prior years, 2014’s budget doesn’t have any major changes that impact the majority of Canadians.  Ottawa did increase the adoption expense tax credit from $12000 to $15000.  And there’s a new tax credit for search and rescue volunteers similar to the one for volunteer firefighters.  Those with diabetes will also be able to claim their diabetes service animals.

But there are no major alterations of tax rates, or alterations to contribution rates for major programs like the RRSP, RESP, RDSP or TFSA.

Still, for people with higher incomes, business owners and new Canadians, there are some targeted tax changes that they should be aware.  These include:

Kiddie Tax Changes – These provisions have long targeted business owners who split income by paying dividends to minor children by taxing them at the highest marginal rates, rather than the lower ones available to kids.

This year’s budget widens the Kiddie tax lens to include business and rental income earned through a trust or a partnership structure, so you’ll no longer be able to make a minor the beneficiary of a trust that earns income generated by the work of adult partners.  The change is effective immediately.

Graduated Tax Rates in Trusts – A long anticipated change eliminates graduated tax rates for testamentary trusts, which essentially allowed income splitting after death.

This is a major change that impacts estate planning for higher net worth Canadians, and the change takes effect in 2015.

If you are thinking of doing some estate planning, it’s important to discuss options beyond these no-longer-available graduated tax rates, since there are numerous other ways to apply a testamentary trust.

Elimination of the Immigration Trust – Ottawa had long granted newly arrived Canadians to place money in offshore trusts for a period of five years at no tax.  In an unexpected move, the Finance minister announced that loophole has now been closed, effective immediately.

Donations on Death Rule Changes – Current rules make a donation through a will claimable in the year of death and in the prior year.  That changes in 2016 when the estate will be able to claim it for the year the gift is made, and any prior year.

Heirs also will retain the option of using the current system.  For some, especially estates that remain open and continue to earn income, this option may add some flexibility at tax time.

Pension Transfer Limits – Starting 2011, Ottawa introduced relief for people who had to commute underfunded pensions to RRSPs, RRIFs or other savings vehicles.  The 2014 budget extends that tax relief.

I hope you find these highlights useful.  If you’d like to discuss these changes and how they may affect your financial plan, please don’t hesitate to give me a call.

Have a great weekend,

Go Canada!

Tracey

 

 

 

 

 

 

 

 

 

 

Source:  Advisor.ca

Considering an RRSP Catch-up Loan?

Trying to decide whether you should get an RRSP catch-up loan before the March 3^rd deadline? 

The theory behind borrowing for your RRSP contribution is based on the fact that you have unused contribution room available and no other source of funds that could be used for your contribution before the deadline.

Where RRSP loans can really make sense is if you were in a higher tax bracket in 2013 and in a much lower tax bracket this year or will be in future years.  A perfect example of this would be if you are planning on retiring sometime this year.  Borrowing to invest in your RRSP now will get you a much larger tax deduction than in future years; this tax savings could outweigh the cost of any interest you will pay.

Another idea, if you have been contributing to your RRSP on a monthly basis; say $200 per month for example, and have accumulated a contribution of $2400 for the year; a top up loan of $1000 could pay for itself.  By taking a $1000 RRSP loan out now, your total contribution for the year will be $3400, if you are in a 30% tax bracket your refund will be approximately $1020 – enough to pay off the loan in its entirety (dependent on other deductions).  Considering most institutions will allow you to defer your first loan payment for up to 180 days, you could get your taxes done and pay off your loan before the first loan payment is due.

What you should know

Unlike a traditional non-registered investment loan, the interest paid on an RRSP loan is not tax deductible.  Furthermore, the rate of return you are hoping to get on the investment inside your RRSP should be well above the non-deductible interest rate you will be paying on the loan for the strategy to make sense. 

If you do take out a loan, you should plan to repay the loan back as quickly as possible to minimize the interest expense of the loan.

Furthermore, if you do have any funds or investments outside your RRSP, you may want to consider transferring those assets to your RRSP for your contribution before borrowing the necessary shortfall.

Borrowing to invest in your RRSP can make sense if you haven’t contributed enough throughout the year or want to catch up on unused contribution room.  We at Security Financial Services have access to such loans and I would be happy to discuss your individual situation to determine if an RRSP loan makes sense within your overall financial plan.

Have a great weekend,

Tracey

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Disclosure:  Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.

Sources:  Jamie Golombek.com, B2B Bank, Dynamic Funds,