RRSP or TFSA? Is It Better To Contribute To TFSA or RRSP? - YouTube

HI EVERYONE AND WELCOME BACK TO THE INDEPENDENT DOLLAR, AS WE MAKE OUR WAY THROUGH THE END

OF OUR JANUARY RETIREMENT AND SAVINGS SERIES.

IF YOU’RE JOINING US FOR THE FIRST TIME, WE MAKE NEW VIDEOS EACH WEEK ON PERSONAL FINANCE

TOPICS IN A WAY THAT IS STRAIGHTFORWARD AND EASY TO UNDERSTAND.

TODAY’S TOPIC IS ALL ABOUT RRSPs AS WE EXPLORE SOME EXAMPLES OF WHEN YOU SHOULD AND IN SOME

CASES, SHOULDN’T BE USING THEM.

NOW THAT THE HOLIDAYS HAVE COME TO AN END AND WE MAKE OUR WITH THROUGH THE START OF

THE NEW YEAR, WE START TO DEBATE WHAT THE BEST COURSE OF ACTION IS FOR OUR INVESTMENTS.

FOR THOSE OF US WHO HAVE BEEN SAVINGS FOR RETIREMENT FOR A WHILE NOW, THE RRSP HAS PROBABLY

BECOME A STAPLE FOR OUR RETIREMENT.

INTRODUCED IN THE LATE 50S, THE GOVERNMENT CREATED THE RRSP AS A WAY TO ENCOURAGE CANADIANS

TO SAVE MONEY.

OVER THE YEARS, THE RULES HAVE CHANGED FOR HIGHER INVESTMENT LIMITS, CARRY FORWARD OF

UNUSED ROOM AND REMOVED MANY RESTRICTIONS ON WHAT YOU CAN AND CANNOT INVEST IN.

ACCORDING TO THE 2016 CENSUS, ALMOST HALF OF CANADIANS HOLD EITHER AN RRSP OR A REGISTERED PENSION PLAN.

THE MAJOR BENEFITS OF THE RRSP IS TWO FOLD:

DEFERRAL OF TAXES UNTIL RETIREMENT AND FORCED SAVINGS THAT HAS A SET PURPOSE AND GOAL.

BUT IS AN RRSP FOR EVERYONE?

TODAY WE’RE GOING TO LOOK AT A FEW DIFFERENT SCENARIOS:

A YOUNG ADULT STARTING OFF IN THE WORKFORCE, AN INDIVIDUAL GROWING IN THEIR CAREER, AND

FINALLY SOMEONE IN THEIR HIGHEST EARNING YEARS BEFORE RETIREMENT.

FOR A YOUNG INDIVIDUAL JUST STARTING OFF IN THE WORKFORCE, THEIR STARTING SALARY AND TOTAL

INCOME WILL BE ON THE LOWER END OF THEIR CAREER EARNINGS.

ACCORDING TO A 2017 STATISTICS CANADA REPORT, THE MEDIAN INCOME FOR SOMEONE BETWEEN THE

AGE OF 16 and 24 was $11,600, LIKELY A RESULT OF PART-TIME WORK WHILE PURSUING EDUCATION ASPIRATIONS.

THE TOTAL TAXES PAID FOR AN INDIVIDUAL LIVING IN ONTARIO WOULD BE AS FOLLOWS:

Federal Tax: $0 Provincial Tax: $0

CPP/EI Premiums: $590

ANY TAXES OWING ARE THROUGH CPP AND EI CONTRIBUTIONS, WHICH WOULD NOT BE REDUCED

THROUGH AN RRSP CONTRIBUTION.

ON TOP OF THAT, WITH NON-REFUNDABLE CREDITS SUCH AS THE WORKING INCOME TAX BENEFIT, THIS

INDIVIDUAL WOULD ACTUALLY BE RECEIVING A REFUND OF OVER $1,000.

THEREFORE, A DEPOSIT INTO AN RRSP WOULD LIKELY RESULT IN TAXES PAYABLE IN RETIREMENT ON INCOME

THAT WOULD HAVE OTHERWISE BEEN TAX-FREE.

IN THIS CASE, AN RRSP WOULD NOT BE ADVISABLE AND EARNED RRSP CONTRIBUTION WOULD SHOULD

BE LEFT TO ACCUMULATE FOR HIGHER EARNING YEARS.

FOR THOSE BETWEEN THE AGE OF 25 AND 34, THE MEDIAN INCOME IS MUCH HIGHER AT $38,400.

IT IS LIKELY AT THIS STAGE WHILE INCOME HAS INCREASED, SO HAVE DEBT LEVELS: TUITION, CAR

LOAN AND MAYBE EVEN A MORTGAGE.

THE SAME INDIVIDUAL LIVING IN ONTARIO WOULD NOW SEE THEIR TAXES RISE TO ABOUT $5,200 AND

ABOUT $2,300 ON TOP OF THAT TOWARDS CPP AND EI.

THEIR MARGINAL TAX RATE IS NOW SITTING AT 20% WHICH MAY OR MAY NOT BE LOWER IN RETIREMENT.

AN RRSP CONTRIBUTION WOULD HELP LOWER THEIR TAXES TODAY BUT UNLESS THAT REFUND AMOUNT

IS REINVESTED, THE BENEFITS ARE LOST.

SO WHAT IS THE IDEAL CHOICE THEN FOR THIS GROUP?

THE TFSA LIMIT FOR THIS YEAR IS $6,000.

THEY COULD CONSIDER MAXING OUT THEIR TFSA INSTEAD TO STILL REAP THE BENEFITS OF TAX-DEFERRED

GROWTH AND ANY WITHDRAWAL IN THE FUTURE WOULD BE TAX FREE, WHICH MEANS NO IMPACT ON

INCOME TESTED BENEFITS AS WELL.

IF THERE IS A SUBSTANTIAL INCREASE IN THEIR INCOME IN LATER YEARS, THEY COULD THEN CONSIDER

USING AN RRSP TO REDUCE THEIR TAXES OWING.

YOUR CAREER IS NOW STARTING TO TAKE OFF AND FOR SOME, THAT MIGHT MEAN A HIGHER LEVEL OF

COMPENSATION OR A MIX OF SALARY, COMMISSION AND BENEFITS.

IF YOU’RE FORTUNATE ENOUGH TO HAVE A WORKPLACE PENSION, WHAT YOU NOW WANT TO CONSIDER IS

THE AMOUNT OF INCOME YOU EXPECT TO RECEIVE FROM YOUR PENSION IN RETIREMENT, AS WELL AS

CPP AND OAS AND COMPARE THAT TO THE AMOUNT YOU WILL BE FORCED TO WITHDRAW FROM YOUR RRSPs.

DOES THE TAX DEFERRAL WORK IN YOUR FAVOUR OR AGAINST?

IF YOUR COMPANY OFFERS AN RRSP MATCHING PROGRAM, THIS MAY BE A REASON TO PRIORITIZE RRSPS,

AT LEAST UP TO THE MATCHING AMOUNT, AS IT IS A GUARANTEED 100% RETURN.

FOR THOSE OF US WHO STRUGGLE TO HOLD ON TO SAVINGS, THE INCREASED DIFFICULTY IN ACCESSING

RRSP FUNDS MAY BE THE PERFECT FIRST AND LAST LINE OF DEFENSE AGAINST LIQUIDATING OUR RETIREMENT NEST EGG.

HOWEVER, AT HIGHER LEVELS OF INCOME, YOUR CPP IN RETIREMENT COULD BE CLOSE TO THE MAXIMUM

AND IF YOU’RE SAVING NEAR THE TOP END OF YOUR RRSP LIMITS, YOUR INCOME IN RETIREMENT

COULD VERY WELL BE HIGHER THAN WHAT IT IS WHILE YOU WERE WORKING.

IF YOU SUSPECT YOUR INCOME IN RETIREMENT TO BE LOWER THAN WHAT YOU EARN NOW, THEN A MIX

OF RRSP AND TFSA WILL ALLOW YOU THE BENEFIT OF REDUCING YOUR INCOME TAXES NOW WHILE STILL

ALLOWING YOU A BUFFER THAT YOU CAN DRAW FROM,TAX-FREE, IN BOTH THE SHORT AND LONG TERM.

IF YOUR INCOME WILL BE AROUND THE SAME OR HIGHER, RRSPs ARE PROBABLY NOT FOR YOU UNLESS

YOU’VE ALREADY MAXIMIZED YOUR TFSA OR YOUR COMPANY OFFERS AN RRSP MATCHING PROGRAM.

AS WE APPROACH THE END OF OUR CAREERS, THE CHALLENGES WE ARE LOOKING AT ARE VERY SIMILAR

TO OUR MID-CAREER STAGE.

AT THIS TIME, A CLEARER PICTURE EMERGES OF OUR INCOME NEEDS AND EXPECTATIONS.

INDIVIDUALS THAT CONTINUE WORKING THROUGH RETIREMENT AGE WILL FACE A DOUBLE EDGED SWORD:

THEY HAVE THEIR PRIMARY INCOME FROM EMPLOYMENT BUT WILL BE TAXED AT A HIGHER RATE ON THEIR

RRSP AND RRIF WITHDRAWALS.

OAS AND OTHER INCOME TESTED PROGRAMS MIGHT ALSO BE REDUCED IF YOUR INCOME IS HIGHER THAN EXPECTED.

IF WORKING IN RETIREMENT IS A LIKELY REALITY FOR YOU, CUTTING BACK RRSP CONTRIBUTIONS IN

YOUR 50S AND 60S MIGHT BE ADVISABLE.

BY FIRST MAXIMIZING YOUR TFSA, YOU WILL GIVE YOURSELF MORE FLEXIBILITY IN RETIREMENT.

ONCE YOUR TFSA IS MAXED OUT, DIVERTING THE REMAINING TO YOUR RRSP WILL ALLOW YOU TO BENEFIT

FROM SOME INCOME TAX DEDUCTION.

HOWEVER, IF YOU EXPECT TO WORK WELL PAST 65 AND YOUR INCOME WILL BE HIGHER IN RETIREMENT,

THEN RRSPs MAY NOT BE THE RIGHT FIT.

THIS WRAPS UP ANOTHER VIDEO IN OUR RETIREMENT AND SAVINGS SERIES, COMMENT BELOW WITH ANY

QUESTIONS YOU HAVE OR TO LET US KNOW WHAT YOU THOUGHT OF THE VIDEO.THANKS FOR WATCHING

AS WE WILL SEE YOU BACK HERE ON THURSDAY.

THANKS FOR WATCHING