It’s that time of the year again; tax season is approaching, and we’re considering how we can overhaul our personal finances.
To say the very least, 2020 was a turbulent year for most people, both personally and financially. Living through an unforeseen and unpredictable pandemic is giving us all a push to look after our financial self-care and build out that rainy day fund.
One way to grow your money — regardless of how much you plan to save — is by investing. A little goes a long way when it comes to investments, and it starts with finding a financial advisor who can help you gain a clearer picture of your financial future — free of judgement. Coast Capital, for example, has been member-owned for more than 80 years, which means the team works in the best interests of its members — not shareholders.
To understand the investment options available to Canadians, we asked Ruby Ubhi, CFP, a Certified Financial Planner based at the Delta branch of Coast Capital Wealth Management, whether we should open an RRSP or TFSA this year.
First things first. How much should I invest to start?
You can get started with as little or as much as you feel comfortable with — even small monthly contributions go a long way. If you have a regular income, you may want to complete a budget to see how much of a surplus you have left over after paying your expenses. With that left over money, you can start a savings plan to “pay yourself” with automatic payments. For example, once you’ve determined an amount you could set aside (example: $100/every two weeks), you can set up an automatic contribution into your RRSP or TFSA — so you can set it and forget it.
I find this is the best way to start saving — as it will happen automatically, and you won’t even miss that $100 every paycheque. If you set this up for one year, it amounts to $2,600. If you’re investing this and earning interest, with the power of compounding interest, you’ll be surprised to learn how much this could amount to in a few years!
What are the main benefits of an RRSP?
An RRSP (Registered Retirement Savings Vehicle), as the name suggests, is a savings vehicle to save for your retirement. The two major benefits of an RRSP: 1) they provide you with an income deduction today and 2) while providing tax-free growth on funds within an RRSP.
So… what exactly does that mean?
The income tax deduction means whatever amount you contribute to your RRSP can be used to reduce the amount of taxable income. For example, if you make $50,000 per year, and you make a $5,000 RRSP contribution, you can use that $5,000 RRSP contribution to reduce your taxable income to $45,000. Depending on your personal tax situation, this could reduce your overall tax bill or result in a refund.
The “tax-free growth of funds” benefit merely means that any income you generate from interest on your RRSP will not be taxed.
What are the main benefits of a TFSA?
The main benefit of a tax-free savings account (TFSA) is that your money within a TFSA grows tax-free, similar to how funds grow tax-free within an RRSP. However, unlike the RRSP, contributions made to a TFSA do not provide an income tax deduction, and withdrawals from the TFSA are always tax-free.
The TFSA, therefore, provides a lot of flexibility for your money. This makes TFSAs a great choice for short-term savings goals as you can easily redirect the money penalty-free to another investment vehicle, like an RRSP, once you start thinking about long-term savings goals like retirement.
Which is better for short-term investing?
I typically advise clients with short-term savings goals to choose a TFSA over an RRSP. The TFSA is typically a better savings vehicle in this circumstance because your money will grow tax-free while within the TFSA, and any withdrawals you make can be made tax-free as well.
Which is better for long-term investing?
Both TFSAs and RRSPs are great savings vehicles for long-term investing. It really depends on your financial situation, and what vehicle is ideal for you. It’s actually quite common for our members to hold both a TFSA and RRSP for their long-term savings. I always advise individuals to connect with their financial advisor so they can really understand your financial goals, and guide you on which vehicle would work best for you.
Can you lose money on these investments?
The short answer is: it’s technically possible, but highly unlikely — especially if you invest your TFSA or RRSP in a low-risk option. The same investment options are available for an RRSP and TFSA — you can invest your RRSP and TFSA as a regular savings account, a term deposit or guaranteed investment certificate, bonds, stocks, or mutual funds.
Lower risk examples in which you can invest your TFSA or RRSP include regular savings accounts, term deposits, and guaranteed investment certificates. In these options, your principal investment (the lump sum you initially invested) is guaranteed to be returned to you, and you’ll earn a set interest rate.
Higher risk examples in which you can invest your TFSA or RRSP include bonds, stocks, and mutual funds, which perform based on economic factors. If your RRSP or TFSA is invested in one of these types of investments, your principal is not guaranteed, and your principal investment will fluctuate with the market.
Again, your financial advisor can guide you on which investment product is best for your TFSA and/or RRSP based on your risk tolerance. If you need to use your RRSP and TFSA in a short time frame (five years or less), typically, a guaranteed investment would be the best option. If you won’t need to use the money within your TFSA or RRSP for five years or longer, a market-based investment could be more suitable.
Creating the right financial plan starts with finding the right financial partner. Led by members for over eight decades, Coast Capital can help you get the most out of your savings and work towards your financial goals.
Worldsource Financial Management Inc., sponsoring mutual fund dealer. The views expressed here are those of the authors and writers only. The information is for general information purposes and is not intended to provide specific personalized advice. Please discuss with your advisor.