TFSA and RRSP: How To Turn Investment Dreams Into Plans

I was very lucky that for most of my childhood I never wanted for anything. Although I didn’t know the extent of it at the time, that was solely due to sacrifices that my parents made for me. As I grew older I was more aware of it and have since always tried to live within my means and be content. The exposure of being in Canada for the last year and a half has given me new perspective. I’ve realized that ambition is not synonymous with greed; ambition is used to push boundaries and break stereotypes. This is what my Mum always wanted for me and my sisters – to keep raising the bar higher and to achieve financial independence.

Soon after my first full-time job I took a baby step towards financial confidence and independence: I started a budget. But achieving your goals doesn’t only come from being smart about saving your money; you also have to be smart about investing your money. Now, do you start with a TFSA or an RRSP? There are so many questions and while the best advice can only come from consulting a professional financial advisor (like Melissa Allen), I’ve broken down a few key details between a TFSA and an RRSP.

So… what are they?

TFSA – Tax Free Savings Account

This is a savings plan sponsored by the Canadian government where investments can grow tax-free. This means that you wouldn’t have to pay tax on any income and growth of those investments. The annual contribution limit is $5,500 each year. You can choose to have the money in your TFSA linked to investments like mutual funds, and you can draw money from it at any time.

RRSP – Registered Retirement Savings Plans

This is also a savings plan sponsored by the Canadian government. Anyone who has filed tax returns in Canada can contribute up to 18% of their earned income for the previous year up to the maximum ($26,010 for 2017) to an RRSP. A great benefit is that the investment into an RRSP is tax deductible which means the contributions are deducted from the income you earned that year, so you can look forward to a nice tax refund! The deadline for contributing to the tax filing year of 2017 is coming up on March 1st, so now is your time!

While investments are tax-sheltered within the RRSP, once they are withdrawn from it, you’ll have to pay taxes on it. The year you turn 71, you must close your RRSP and draw income from it by converting it to a Registered Retirement Income Fund (RRIF) or by buying an annuity. The main purpose of an RRSP is tax-deferred retirement savings, meaning that you’ll pay taxes at retirement, when your marginal tax rate may be lower.

So, who is it ideal for?

Both RRSPs and TFSAs are ideal for EVERYONE living in Canada, because we all need a nest egg—whether for retirement, or to save for big purchases and projects. A TFSA may be more suitable for you to start with if you plan on making smaller contributions and may need to draw this money ever so often.

Start by assessing your priorities. If you are still paying off debt (for example student loans, etc.) or your priority is saving for a car you may want to start with a TFSA. If your priority is saving for a home, invest in an RRSP so you can take advantage of the First-time Home Buyer’s Plan (note: that’s another discussion in itself!)

Remember that you don’t necessarily need to choose between the two. A good first step is a TFSA. An RRSP on its own is great, but a TFSA can be a fantastic complement.  Anyone who has a Canadian SIN number and is 18 years old or older can open and contribute to a TFSA, and the annual contribution limit is $5500 a year. The main purpose of a TFSA is tax-sheltered savings.

When should I start?

Ideally, we should all start a TFSA as soon as we turn 18 and an RRSP as soon as we file a tax return from our very first job in high school, but often life doesn’t work that way. Between tuition, student debt, and establishing our careers, it can be hard to start saving immediately after becoming eligible.

The ideal time to start is as soon as you can afford to, even if it’s a small amount at first. The great thing is that unused contribution room can be carried forward indefinitely! In most cases, you can start contributing with as little as $25 a month to each plan. You can always increase your contribution amounts as you pay off student loans and other debt, receive any cash windfalls, and increase your income. Me personally, I started contributing to a TFSA soon after receiving my first full time job.

I was so nervous to even start the discussion of investments. If you’ve not started investing yet, what are some of the things holding you back? We’d love to know in the comments below.



Photo by Samantha Clarke


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