Tuesday, January 22

Saving Money in a TFSA and RRSP On Any Budget

Google+ Pinterest LinkedIn Tumblr +

It’s easier than you think to fit saving into any budget — if only because any amount of saving is worth doing even on the tightest of budgets!

Many people claim that they can’t save enough for retirement or emergencies because they have too many other financial obligations. The truth is the habit of saving matters a lot more than the amount you save, especially when you’re just getting started. Saving $25 per month is better than saving $0. Furthermore, it’s much easier to go from saving $25 per month to saving $25 each week than it is to go from saving nothing to $25 a week!

How much you can start saving depends on how much wiggle room you have in your budget. Of course, knowing that depends on having a budget in the first place.

Making budgeting easy

The first step to fitting saving into your routine is to make a budget. Drawing up a budget doesn’t have to be time consuming or difficult. In fact, you can input everything you need into this budget calculator and it will tell you exactly where you stand.

Many people think making a budget automatically means creating a restrictive financial diet you need to stick to from now until the end of time. But it’s actually worthwhile to make a budget, simply to be aware of all the money you have coming in and going out.

You might think you know where your money is going, but you’re more likely than not to find a surprise or two when you sit down and itemize everything. For example, don’t forget annual or one-time expenses, like property taxes or new winter tires for your car. Likewise, set aside some extra cash for prescription medications, gifts and charitable donations.

Don’t forget: Your budget is as personal as you are. There is no “right” amount to spend on housing or your car or dining out or takeout coffee. All that matters is that you’re not spending more than you make, and you’re spending on things that make you happy!

Other calculators you might find useful:

Saving and investing in the TFSA vs RRSP

You should save at least 10% of your pre-tax income for retirement. But where and how you save this money is as important as how much you save!

Where should you save? First, in registered accounts like the tax-free savings account (TFSA) and registered retirement savings plan (RRSP). All Canadians should be saving in their TFSA, and most should also be using their RRSP. Wealthier people or super savers may be able to max out both their TFSA and RRSP and then move on to saving additional funds in unregistered accounts.

For most, focusing on saving in the TFSA first and the RRSP second is an easy rule to follow. But if you’re unsure, here’s how to choose between the TFSA and the RRSP. Below is an in-depth break down of how these accounts work:

The TFSA

TFSA stands for tax-free savings account and refers to a type of registered account introduced in 2009 to help Canadians save money. When you put money into a TFSA, any income earned within the account through interest, dividends, or capital gains is tax-free.

Because you’re contributing to the TFSA with after-tax income, you’re not going to have to pay taxes on this money again (or the income it earns) upon withdrawal. It doesn’t matter when you make a withdrawal, or how much you withdraw: The withdrawal stays tax-free.

Every Canadian 18 years of age or older, regardless of income-level, is entitled to the same amount of annual TFSA contribution room. For each year since 2009 in which you were age 18, unused TFSA contribution room will be carried forward. If you’re like me, you were already over 18 in 2009, and therefore are entitled to the full lifetime contribution TFSA room . 2019 will be an exciting year for the TFSA, because contribution room is increasing from $5,500 to $6,000!

You can save money in your TFSA for retirement, or for whatever you want. You can make a withdrawal from your TFSA without penalty at any time. The amount you withdraw in one year becomes additional contribution room the following year, on top of the contribution room for that year.

The RRSP

RRSP stands for Registered Retirement Savings Plan and refers to a tax-sheltered account for Canadians. Your individual contribution room is proportional to your taxable income and works out to be approximately 18% of your prior year’s earned income, up to a maximum capped by the government.

Unlike the TFSA, money in your RRSP is tax-deferred, not tax-free. This means you won’t pay taxes on assets within your RRSP and you will receive deductions for the years in which you make your contributions, but your withdrawals from it will be subject to income tax at that time. Because the majority of people will have a lower income in retirement than in their working years, you can save on income taxes by contributing to your RRSP now and waiting to withdraw from it in the future when you retire and stop earning an income.

While your RRSP is a designated savings account for retirement, there are some strategies to use it for other things. The RRSP first-time Homebuyer’s Plan will let you withdraw up to $25,000 from your RRSP without penalty for a down payment on your first home. You then have 15 years to repay this balance, beginning the year after you purchase your home. You can also withdraw $10,000 per year up to a maximum of $20,000 to pay for your qualifying school tuition and books under the RRSP Lifelong Learning Plan. This is a great option if you want to go back to school to gain a degree or certificate to increase your earning potential. Again, you have a time-limited window to put the money back in your RRSP, or you’ll have to pay tax on your withdrawal.

Saving in the TFSA and RRSP is great, but investing is better

I frequently say that both the Tax-Free Savings Account and Registered Retirement Savings Plan are misnamed because they both have “savings” in their titles. Despite the names, these do not have to be savings accounts.

You can and should invest in both your TFSA and RRSP. You can invest in mutual funds, ETFs, stocks, and bonds under the TFSA and RRSP umbrellas. The designation of TFSA or RRSP only refers to how the account is taxed, not what’s actually in it! To really maximize the power of these accounts, choose an investment of some sorts instead of just a simple savings account. Your future self will thank you!

Seeking out a financial advisor for help

If you do get stuck creating a budget or making a saving plan, an advisor can help.

An advisor can assess your current financial situation, help you set achievable financial goals, develop a realistic plan to meet those goals, understand how other programs may affect your plans, help you put your plan into action and monitor your investments against your plan regularly. You can speak to a Sun Life Financial advisor with no obligation.

This post was sponsored by Sun Life but all views and opinions expressed herein are my own.

Share.

About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary, and PhD from the school of life in being a badass. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

1 Comment