The annual RRSP deadline also comes with lots of questions.
Will you make a contribution? Will you put it in fixed income or equity investments?
This year, you may need to ask yourself an additional question: Do you put your money in a Registered Retirement Savings Plan, or a Tax-Free Savings Plan?
The answer will depend on how much money you make, as well as your personal financial situation, and a host of other factors.
But what financial planning experts do agree on is this: The TFSA, as it’s known, can be a great tax planning tool that, for many Canadians, will be a key way to build wealth down the road.
“I believe over the next 20 years or so, you’re going to be looking at TFSA accounts that are well into the six figures, in other words over $100,000, just from people contributing every single year, plus the growth on that money,” said Jamie Golombek, managing director, tax and estate planning, for CIBC Private Wealth Management.
“People should not be ignoring TFSAs.”
Financial planning experts agree that if you are in a low-income bracket now â€” if you’re making less than $40,000 annually â€” it doesn’t make much sense to contribute to an RRSP because you won’t be saving much on taxes.
As well, you could end up having some government benefits clawed back in retirement if you are withdrawing a large amount from your retirement nest egg.
Keep in mind that the government prescribes how much can be withdrawn from the registered account, (by then you will have converted it to a RRIF, or Registered Retirement Income Fund) and those withdrawals are classified as income.
Withdrawals from a TFSA savings account, on the other hand, are not counted as income.
For people in a lower income bracket, “starting a TFSA and consistently contributing $5,000 a year would be a great boon,” said Adam Salahudeen, of Scotiabank. “Don’t be fooled into thinking that it doesn’t sound like very much.”
For example, $5,000 a year invested annually with a 6 per cent rate of return and no withdrawals would grow to more than $550,000 over 35 years.
“While today that $5,000 contribution doesn’t seem like very much, in 20 years from now, that build-up of contribution room will be very powerful,” SalaÂhuÂdeen said.
If you are in a high-income tax bracket now and expect to be in a lower one in retirement, as most people would be, it’s a good idea to contribute to an RRSP first, then do your additional savings in a tax-free account.
There are important ways to use these accounts together. For instance, if you are not earning much now, but expect your income to climb in the coming years, start saving in a TFSA and then pull it out to contribute to an RRSP.
“Then you would get a tax deduction when you’re in a higher tax bracket and you would restore your TFSA contribution room the following year because any withdrawals from a TFSA can automatically be recontributed the following year,” Golombek said.
Keep in mind that, unlike withdrawals from an RRSP, there are no taxes to be paid on a TFSA. You can take out as much as you like at any time for any reason. Withdrawals are simply added to your contribution room the following calendar year.