Everything You Need To Know About RRSP and TFSA Contributions
Start Your Registered Investments With Our Team
As you go through life, your goals change: buying your first car or first home, saving for education or retirement, starting a family or leaving a legacy for your grandchildren. You'll need to take a different approach for each new step, and your investment plan should reflect that.
The Auxilium Team takes a global and wholistic approach to your finances. One of the ways we work with you is through our Trusted Partner at Shoreline Financial & Investment Services who offers investment solutions to complement every life stage.
Through leading national Insurance carriers, we offer Segregated Funds that can add both growth and guarantees to your investment plan. Segregated Funds have some unique features that are only available from an Insurance company:
- Top-up Guarantee. When your segregated fund matures, the fund issuers pay a top-up (up to 100% of your original deposit) to you or your named beneficiaries, even if the market value is less.
- Estate Planning Benefits. If you were to pass away before your segregated fund matures, your beneficiaries would have the ability to bypass probate for the payout, minimizing estate fees and taxes.
Tax information for segregated funds is tracked and reported by the insurer on your behalf, simplifying your annual tax-filing process. Additionally, segregated funds have the ability to flow through net capital losses as well as net gains to you. The result is that you can choose when to claim capital losses on your annual tax return; the losses can be carried back three years or carried forward to future years.
Registered Retirement Savings Plan (RRSP) Basics
The deadline to contribute to an RRSP for the 2019 tax year is March 2, 2020.
At the beginning of the calendar year, there's a large focus on RRSP contributions because they are tax deductible: every dollar you contribute comes off your current year's taxable income. Essentially, this investment allows you to delay paying taxes on that income until you retire, when you'll likely be in a lower tax bracket.
In order to maximize your investment, you will want to know your Marginal Tax Rate. This is the tax rate that will be applied to the next dollar you earn and depends on which tax bracket you are earning in, for both federal and provincial income taxes. By making RRSP contributions, you can reduce your taxable income in the higher tax bracket. For example, if you made $60,000 last year and contribute $5,000 dollars to an RRSP, you'll only be taxed on $55,000; you'll save money immediately by paying less tax in a higher tax bracket, in addition to the benefits of saving for your retirement.
When figuring out how much you can contribute, your annual limit is 18% of the earned income you reported in the previous year, up to a maximum amount that is set by the Canada Revenue Agency. If that amount is more than you can manage to invest right now, you're able to carry the unused portion forward indefinitely. You can find your exact RRSP contribution limit on your latest notice of assessment or reassessment.
If coming up with a large lump sum to invest is too daunting, we can also set up a regular savings plan that will make a smaller monthly contribution to your RRSP. It's generally much easier to come up with $100/month, rather than waiting until January or February to come up with $1,200! By contributing more frequently throughout the year, your money will begin working for you sooner thanks to compound growth.
Tax-Free Savings Account (TFSA) Basics
Despite its name, a TFSA does NOT have to be a savings account with your bank. Consider it as another option for an investment account, where your investments can grow without having to pay tax on the earnings. You can have a combination of investments within your TFSA, including segregated funds.
There is a contribution limit to how much you can put in to your TFSA each year, set by the federal government and the same for all Canadian adults regardless of your income. Much like an RRSP, the contribution limit accumulates over time, which means if you don't reach the limit one year, you don't lose it.
Because your TFSA has so much flexibility, you can use it as a savings vehicle for both your short-term goals (your next vacation, a new vehicle, or a home renovation) as well as your long-term goals.
As registered investments, RRSPs and TFSAs are both in the same category so they function in very similar ways. The biggest way they are different is in how they are taxed. With an RRSP, any growth within the portfolio is tax-sheltered and you only pay taxes when you make a withdrawal, which is then taxed as income. With a TFSA, it's the opposite: the deposits you've made have already been taxed as income and when you make a withdrawal, that is tax-free.
The Auxilium Team is ready to help you achieve your financial goals and make sure your investments are supporting them. Whether you are setting up your first registered investment or you want to compare your existing investments with our options, the first step is a conversation with our Trusted Partner at Shoreline Financial & Insurance Services. Give Tami a call at 250-475-6601.
Insurance Services provided by Auxilium Insurance Services. Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.