Friday, May 12, 2017

Spend Less, Save More

As we 'spring' into May, many of us are receiving an income tax return. Should you save it or spend it?

If you choose to save, it presents the question of whether to invest in a TFSA or an RRSP. This debate comes up often here at Continuum II and here is what we suggest: 

There are both pros and cons to TFSAs and RRSPs.

- Used to save for retirement.
- Contributions are tax deductible and investments grow tax-free within the account.

- Contributions are taxable once they are withdrawn.
- Withdrawals are considered income and can affect eligibility for federal-income benefits and tax-credits.
- Once you withdraw from your RRSP the contribution room is gone.

- TFSAs can be used for both retirement and extra savings.
- Investments grow tax free within the account.
- Withdrawals do not count as income and therefore do not affect your eligibility for federal-income benefits or tax-credits.
- Contribution room is not lost upon withdrawal of investments, it is added to your limit for the following calendar year.

- Contributions are not tax deductible.
- Must be 18 years or older to have a TFSA account.
- Contributions are limited, and there is a penalty for going over your limit.

Which is right for you? While there are pros and cons to both a TFSA and an RRSP- the ultimate choice on where to invest your savings will depend on your unique financial situation.

If you are in a low income tax bracket, a TFSA might be more beneficial to your financial situation. Based on your income, the tax savings of an RRSP are less significant and you risk being in a higher tax bracket when you eventually make a withdrawal.

If you are in a middle tax bracket, we suggest having both a TFSA and an RRSP. By having both types of investment plans you could contribute to your TFSA now and accumulate RRSP room to be used later if you move into a higher tax bracket. This can help you to optimize the tax benefits attached to both types of accounts.

For those in a high tax bracket, having both an RRSP and a TFSA can also be beneficial. For similar reasons to those in the middle tax bracket-an RRSP might be a better choice if your current tax rate is higher than you expect upon withdrawal of your savings. You'll benefit from the tax deduction given on contributions and your withdrawals will be taxed less when you withdraw during retirement. You can also use your tax refund from your contribution benefit to fund your TFSA.

Talk to your Continuum II advisor today and let us help you determine the best tax-advantaged savings strategy that meets your needs.