A Beginners Guide to Saving Strategies in Canada
RRSP - Registered Retirement Savings Plan
What is it?
According to Government of Canada;
An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.
1. Tax Benefit - Whatever you put towards your RRSP, it'll be deducted from your taxable income for the year, so you would be paying lower tax.
2. Employer Programs - Many employers offer RRSP benefits where they would match your contributions up to a certain % or $ amount. (FREE MONEY)
3. No tax implications/penalties as long as you do not withdraw it.
4. Funds can be used to put towards mortgage down-payment without any penalties, but will need to be paid back into the RRSP.
Concerns:
1. Money locked in until retirement, penalties imposed upon early withdrawal.
2. Tax implications upon withdrawing from it post-retirement, at the income tax rate applicable at the time of withdrawal.
3. Contributions limits apply based on your income from previous year.
RESP - Registered Education Savings Plan (for Parents)
What is it?
According to Government of Canada;
A registered contract between an individual (the subscriber) and a person or organization (the promoter). The subscriber generally makes contributions to the RESP, which earns income, paid in the form of educational assistance payments to one or more identified beneficiaries.
Pros:
1. Government Grants & Contribution - A $500+ government grant to get you started and the government matches 20% on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary per year. The lifetime maximum per beneficiary is $7,200, up to age 18. (FREE MONEY)
2. No tax implications/penalties while the fund is being accumulated.
3. Great way to plan ahead for higher education of children.
Concerns:
1. Money locked in until child's admission to a recognized educational institute.
2. Tax payable upon withdrawal, at the income tax rate applicable at the time of withdrawal.
TFSA - Tax-Free Savings Account
What is it?
According to Government of Canada:
The TFSA program began in 2009. It is a way for individuals who are 18 years of age or older and who have a valid social insurance number (SIN) to set money aside tax free throughout their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
Pros:
1. No Capital Gains Tax!!
2. Can be withdrawn at anytime without any tax implications.
3. Can be used as a rainy day fund or towards an individual savings goal!
Concerns:
1. Contribution limits apply, after which taxes and penalties may apply.
2. No free money here! You're contributing from your income after tax.
What's the Best Investment Strategy?
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