The end of the year is approaching and you have some important financial decisions to make. If you’ve been contributing monthly to a Registered Retirement Savings Plan (RRSP) for the past year, give yourself a pat on the back; your RRSP contributions for 2018 will be taken care of. If you’ve been contributing to a Tax-Free Savings Account (TFSA) throughout the year, that’s also good news, as you can use the funds you’ve saved for any purpose and you won’t incur taxes upon withdrawal.
Tax-Free Savings Accounts
TFSAs are an excellent and flexible way to save, says Dwayne Rettinger of IG Private Wealth Management. “You put your money into a TFSA and you get your money back out — at any time, for any purpose. With a TFSA, there is no tax deduction for your contributions but all TFSA investment earnings are totally tax-free and will not trigger clawbacks on federal tax credits or benefits programs.”
The current annual maximum TFSA contribution is $5,500 plus the full amount of any previous year withdrawals as well as unused contribution room from previous years. You can find out what your contribution room is through the Canadian Revenue Agency. Note that TFSA contributions do not affect your RRSP contribution room.
Registered Retirement Savings Plans
For many Canadians, a lump sum contribution close to the RRSP deadline (March 1, 2019) is the preferred option. Contributing to an RRSP within the first 60 days of 2019 allows you to reduce your taxable income for the previous year.
If you have any unused contribution room left over from previous years, try to fill it up as quickly as possible for maximum long-term tax-deferred growth and additional tax savings. Your RRSP contribution tax deduction can be carried forward to future tax years, which can be useful if you expect a significant rise in income over the next few years.
“An RRSP is the best retirement savings strategy for most Canadians,” says Dwayne Rettinger. “Your contributions and all the investment earnings that accumulate in your plan are tax exempt until you start using the money in retirement. Add in the fact that your contributions can be used to reduce taxes and the magic of compounding that enhances RRSP growth over time and it’s easy to see why a registered plan makes such good financial sense.”
Whether you choose RRSPs or TFSAs, regular contributions make the most sense. There are two good reasons for taking this approach. First, you won’t stress and scramble at the end of the year. Second, your investments have room to grow throughout the year.
But no matter your choice, be sure to consult a professional financial advisor before making any decisions so you can take care of your financial future.
Dwayne Rettinger
Investors Group Financial Services Inc.
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