Save taxes using Canada’s array of Registered Investment Accounts
A registered account is an investment account with preferred tax status from the Canadian government. The most common Registered accounts are:
- RRSP- Registered Retirement Savings Plan
- TFSA- Tax-Free Savings Account
- RESP- Registered Education Savings Plan
- RDSP – Registered Disability Savings Plan
- RRIF- Registered Retirement Income Fund
This note will focus on RRSPs and TFSAs, as people often wonder which is more suitable for them. We’ll cover the other accounts in later notes.
RRSPs have two main advantages:
1.) Contributions are tax deductible, meaning you save taxes right away. For example, if your 2023 taxable income in Ontario was $150,000, and you made a $10,000 RRSP contribution, you would immediately save $4341 in tax. Put another way, it only cost you $5659 to set aside $10,000 for your retirement.
(2) The growth of your investments inside the RRSP is not taxed as income.
The main downside of an RRSP is that withdrawals you make, typically in retirement, are taxed as income. Since your income in retirement is usually less than your income when you were working, the overall tax burden is lessened. More importantly, by not paying taxes annually on the growth, you have more money working for you all along until you retire and start taking an income.
The annual amount you can contribute is 18% of your income (to a maximum that is currently around $30,000 per year). Unused contribution room can be carried forward indefinitely. Login to CRA to see how much room you have.
Contributions made by March 1 of a year can be claimed against the income of the prior year which is why January and February are often referred to as “RRSP Season”.
Contributions to a TFSA do not reduce your taxes owning. Their big advantage is that not only is the growth tax-free like an RRSP, withdrawals are also tax-free.
The name “Savings Account” may imply that it operates like a bank account, but it really should have been called a Tax-Free Investment Account, because you aren’t limited to guaranteed interest products. You can hold all kinds of different investments inside a TFSA, the same as an RRSP.
You earn TFSA contribution room every year after turning 18. If you were born in 1991 or earlier and have never opened a TFSA you have contribution room of $88,000 as of Jan. 1, 2023. The 2023 limit is $6500.
So which is better?
We believe that both RRSPs and TFSAs have an important role to play in helping you achieve your wealth management objectives. Especially for incomes over $100,000, the immediate tax savings of RRSPs are meaningful. TFSAs are great for specific nearer-term savings objectives, such as saving for a car or the down payment on a house. It’s probably best to discuss your specific situation with us before deciding whether to make use of one or both these tax-preferred account types. Give us a call today!