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 Essentially, the money invested through this account isn’t taxed until it’s withdrawn, at an age when the beneficiary is in a lower tax bracket, because they have a lower income.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!
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