To pay less in taxes today, achieve your dreams tomorrow or ensure peace of mind at retirement, it’s never too early to start saving. This strategy is even more lucrative when you’ve invested your savings well. You might already have an RRSP, a TSFA or an RESP, but do you know how to make the most of them?
Sixty years after its creation, the Registered Retirement Savings Plan (RRSP) has been adopted by more than 6 million Canadians as a vehicle to grow their money while paying less in taxes. Essentially, the money invested through this account isn’t taxed until it’s withdrawn, at an age when the beneficiary is in a lower tax bracket, because they have a lower income.
“Opening an RRSP is like setting aside some of your salary for later, and paying only a fraction of the taxes you would have owed at the time you made your contributions,” explains Judith Poirier, Assistant Vice-President of the Investment division at National Bank. “What’s more, unlike a retirement pension fund that’s paid out a little bit at a time, with an RRSP you can decide how much you want to withdraw. Which is great if you’re planning a sabbatical, for example!”
How can you optimize it?
Initially created for low-income individuals, the Tax-Free Savings Account is gaining popularity among all savers, attracted by its flexibility.
“The TSFA is a bit like the nest egg hidden away in your home,” Judith Poirier kids. “You can invest and withdraw whenever you want, without paying tax. I particularly recommend it to people with lower incomes, because it doesn’t impinge on their access to social benefits.”
How can you optimize it?
Judith Poirier and her colleague Chantal Lamothe, financial planning expert, developed a real-life situation to demonstrate the impact of an optimized savings plan.
Marie is 46 and has a net salary of $50,000 per year. She spends $36,000 on living expenses and invests $14,000 a year in a balanced fund, to fund her retirement which she hopes to take at age 63, in December 2034. She receives an inheritance of $25,000 and wonders what impact this money will have on her retirement.
Depending on how she invests that inheritance, Marie can either stop working earlier, at 62, or considerably improve her cost of living upon retirement.
Case 1: She deposits her $25,000 in a bank account. In
December 2034, the anticipated date of her retirement, her
inheritance has increased to $26,220.
Case 2: She deposits her $25,000 in a TSFA. In December 2034, her inheritance has grown to $44,248.
Case 3: She deposits her $25,000 in an RRSP, and her tax refund into an RRSP. In December 2034, her inheritance has grown to $57,424.
From case 1 to case 3, you can see that Marie’s inheritance grows at different rates, depending on the investment vehicle she chooses. Given her situation, Marie should definitely consider investing her inheritance in an RRSP and maximizing her profits by growing her tax return in a TSFA. In doing so, she’ll be able to retire about one year earlier, or increase her spending once she stops working.
The Registered Education Savings Plan (RESP) allows parents to invest up to $50,000 for their child’s post-secondary education. This contribution gives you the right to a 30% government subsidy. Once the student is enrolled in university, they can withdraw the amount of the subsidies as well as any interest. These withdrawals are taxable, but because the student usually doesn’t have much income, they will pay little or no tax. As for the contributor, they can recuperate their capital without any tax deductions.
“Currently, the RESP is the most lucrative account on the market,” says Judith Poirier. “If you have children, it’s the best savings strategy to adopt.”
How can you optimize it?
Beyond the financial strategy you can develop by comparing the
advantages and constraints of the various investment options available
on the market, the advice of a financial planner will help make sure
you’re not missing out on any tricks that might maximize your profits.
Don’t hesitate to share every element of your professional journey and
your personal situation, because, you guessed it: in financial
planning, even the little details can have a big impact!
Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank of Canada.
The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information belong to the National Bank of Canada or other persons. Any reproduction, redistribution, electronic communication, including indirectly via a hyperlink, in whole or in part, of these articles and information and any other use thereof that is not explicitly authorized is prohibited without the prior written consent of the copyright owner.
The contents of this website must not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice. National Bank and its partners in contents will not be liable for any damages that you may incur from such use.
This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.
The hyperlinks in this article may redirect to external websites not administered by National Bank. The Bank cannot be held liable for the content of external websites or any damages caused by their use.
Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).