Your RRSP and your TFSA are your best allies to build your financial security

If you are over 18 and working, RRSPs and TFSAs will be essential tools for you to build financial security for your future.

The key is to invest the money in these low-cost plans well, and to grow that money over the long term for retirement.

So it’s not enough to pile money into either plan; you have to make it work for you through wise investments.

If you’re relatively new to investing or planning for retirement, here’s what you need to know about the two plans.

RRSP and TFSA are tax efficient

With an RRSP, you save tax today and pay it later in retirement, ideally in a lower tax bracket than you currently find yourself in.

With the TFSA, you save tax in the future by investing today with after-tax dollars. Thus, at retirement, the money withdrawn from your TFSA will be tax-free.

With the RRSP, you can contribute 18% of your annual income, up to a maximum of $27,830 for the 2021 tax year. With the TFSA, you can contribute $6,000 in 2021, regardless of your income.

With both plans, if you don’t use the available room, you simply roll it over, which is a good option in case you can’t afford to make dues a year, but have the ability to play catching the next one. year or two, for example.

The most reliable source to see exactly your available room in both plans is through My CRA Account. Log in to the CRA secure portal and you will see the eligible balance for your two plans.

Should one plan be favored over the other?

The ideal situation is to contribute to both, maximizing your annual contributions. But, let’s face it. It can take time, and if you’re making less money or struggling with costly consumer debt, it might not make sense to focus on your RRSP just yet.

General advice that I like to give to my students and clients is: if you earn more than $55,000 in any given year, the RRSP will be a more powerful tool for you in terms of tax savings. The reverse is true if you earn less than that. In this case, I recommend that you focus on the TFSA first, then your RRSP as a secondary tool.

Everyone’s tax situation is different, and that’s where having an accountant or financial advisor on your dream finance team can come in handy. They will be able to calculate for you the plan that will be the most tax-efficient for you given your total financial situation.

Many people find a balance between contributing to both accounts to ensure they benefit from both accounts and their respective tax benefits.

Here’s how to get started with these plans

All major financial institutions in Canada can help you open an RRSP and a TFSA, provided you have the correct identification. Some Canadians choose to go with their primary bank. Others work directly with a wealth management company. Still others choose do-it-yourself solutions or hire a robo-advisor to manage their accounts. The best fit will depend on where you are most comfortable, where fees are lowest and where the best long-term performance occurs.

Before you sign up somewhere, do some research, ask around, and get recommendations.

In many cases, but not all, you will need to increase the balance to at least $1,000 before the funds can be invested in the market.

When you’re ready, automate your contributions

Automation allows you to “outsmart” your forgetful self by regularly transferring money directly into your RRSP and TFSA. Most people choose payday for this, but take a look at your cash flow to see when it’s the best time for you to contribute. Generally, you should add a minimum of $25-50 per contribution. Over time and hopefully as you earn more, you will be able to contribute more to these schemes. But something is better than nothing. Go at a pace that suits you.

What about investments outside of these plans?

This will certainly make sense if you’ve contributed the most you can to RRSPs and TFSAs, or if there are other limitations or caveats as to whether you can or should open one or the other ( an example could be your citizenship). However, if there are no particular and factual considerations, the RRSP and the TFSA will probably be your best friends to prepare for your retirement. Once they are fully funded, move on to non-registered investments.

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Sarah J. Greer