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The Govt’s gift to you; RRSPs & TFSAs!

Updated: Sep 15, 2021

I don’t know any other way to put it, both RRSPs and TFSAs are “gifts” from the Canadian Government, and are intended to incentivize Canadians to save and/or invest money towards their future retirement or purchases. To not utilize them for investing and saving towards a goal or your retirement is like giving your money away.

The TFSA limit for 2021 is $6000 per individual, and every Canadian 18 years old with a SIN (social insurance number) started accumulating TFSA room in 2009 when the program was started. Since 2009, the lifetime allowance accumulated is $75,500. If you turned 18 and had a SIN later than 2009, your lifetime allowance will be reduced based on the year you started and the contribution limits in that year and the following years. In past the annual allowances have been lower and higher at times, so you need to check annually to see if this amount changes, or look back if you are trying to calculate your adjusted lifetime allowance based on starting later than 2009. If you haven’t used up your lifetime allowance, it continues to carry-over and accumulate, and you can use it up any time. FYI the similar program in the USA is called an IRA.

An RRSP has a few benefits when you purchase it. The first is to reduce your taxable income by the value of the RRSP. In reducing your taxable income, the tax you paid through the year on this value is returned to you at your marginal tax rate through your annual tax return. This is a great way to reduce your taxes, especially for high income earners with free cash on hand to fully utilize their RRSP room annually. In my early years I would borrow money to contribute to an RRSP, partially pay it back on receipt of my tax return, strive to pay it off in the following months before year-end, and repeat the same process the following year. Another RRSP advantage, is the tax on any investment growth (capital gains) or the re-invested distributions (investment income) are deferred until withdrawal. This is beneficial when you retire as you will be drawing less income, and thoretically in lower or lowest tax brackets. Using RRSPs will significantly reduce your tax hit in your working years, and in retirement if used properly. An RRSP shelters your investment and it’s growth from tax, and returns that income to you in retirement at lower tax rates if you plan properly. Also notable, RRSP money has unlocking rules, which makes it tougher to access early if you need it (e.g. major life changes). However, taking it before you retire is not what it’s intended for or what you want to do, as you could lose the tax-deferring benefits.

A TFSA is a bit different than an RRSP. Money placed in a TFSA is completely tax free, providing you don’t go over your allowance. NOTE - it is your responsibility to track and manage to your limits, and if you go over you can expect to be taxed on those amounts. Your TFSA allowances and contributions can also be found on the myCRA website, though keeping your own record is advisable too, as they are potentially inaccurate or not updated. However, stay inside the limits, and any money you make on it is not taxed.... EVER. These savings vehicles are hugely beneficial for savers and investors. Arguably, your TFSAs should be maximized before your RRSPs because this is free money in the future, with zero tax implications. Especially for low income earners, who cannot maximize both RRSP and TFSA room, and do not gain a significant tax break from RRSPs due to the fact they are already in lowest tax brackets. The other benefit is TFSA money can be accessed easily any time you need it. RRSP money is not so easy to cash in and get at early. Even if you do, it’s added to your current income and taxed at your current tax rate, plus you lose the contribution room and cannot make it up. Also, if you are earning more now then when you bought the RRSP, it may be taxed at even a higher rate then you benefited from when buying it? There are ways to effectively borrow from your RRSP and pay it back, e.g. for house down-payments (must be paid back in 15 years) or personal training (must be paid back in 10 years). These are tax free, but only if you pay them back inside the agreed terms.

You can walk into any financial institution and they will be more than happy to set you up with an RRSP or TFSA. Usually with some extra cost for the advice or the investments you choose to hold in them. However, as mentioned in my introductory BLOG, I am a proponent of DIY investing and low-fee, index-tracking ETFs. I have had RRSPs and TFSAs open in a brokerage platform at my bank since 2008, and opened the same with my daughters in 2015 with Questrade. I discovered late in life that FEES DO MATTER, ... alot! I also learned that passive, index investing is a low cost, sleep-at-night approach to accumulating wealth. I was disinterested and somewhat fooled for ~30 years into thinking it was all way too complex for me to learn and manage myself. It really isn’t too hard to learn, but takes a bit of effort to teach and manage yourself, and a bit of trust in yourself. First, start small and learn. Now I am starting the decumulation phase.

Try not to let these programs (RRSPs and TFSAs) go totally un-utilized. Even if you can only put a little bit in monthly. Setting up regular, automated contributions helps. It is tough to catch up later, unless you significantly increase your income and/or decrease your expenses. You have till last business day in Feb to get an RRSP for the prior year, and the TFSA year resets Jan 1. You can contribute inside these windows all year towards your contribution limits.

*** RRSPs and TFSAs truely are the Govt’s gifts to you! ***

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