The TFSA limit just grew to $6000, and here's what that means for you

Jan 28 2019, 7:24 pm

It’s that time of year — you’re probably hearing the abbreviations “TFSA” and “RRSP” everywhere right now — but what do they mean for you?

A TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) are quite different in terms of how they can be used to benefit you, both now and in the long run.

Should you have just one TFSA/RRSP? Or both of them? We asked the experts at G&F Financial Group to learn more.

How a TFSA really works

If one of your goals for 2019 is to get your savings on track, a TFSA could be for you. With this account, your return on the investment is accumulated tax-free and you can withdraw your funds at any time with no tax implications — and for any purpose. The options are wide open, whether you want to buy a new car, renovate your home, pay off a debt, take your dream vacation, or even help grow your retirement nest egg.

There’s no ‘earned income’ requirement to open a TFSA, so they’re a great option for just about anyone. You don’t have to close a TFSA at a certain age, instead, you can open a TFSA at 19 (you start accumulating contribution room at 18) and keep saving as long as you like.

There are, however, annual TFSA contribution limits, and for 2019 it’s capped at $6,000. If you decide not to contribute one year, your unused contribution room will be carried forward, and you can put more in your TFSA the following year. If you take money out of your TFSA account in one year you can even recontribute that amount again the following year.

minimum wage

Image: Money / Shutterstock

What a RRSP looks like

Is it ever too early to start planning for retirement? Absolutely not — in fact, the earlier the better! While there’s no minimum age for starting a RRSP, the account must close by the end of the year you turn 71 (at this age withdrawals need to begin and the investment typically gets converted into a RRIF, a Registered Retirement Income Fund).

The benefit of using a RRSP to save for retirement is tax savings. Money contributed to a RRSP reduce your current year’s taxable income which means you pay less tax today. Any investment earnings in a RRSP are tax-sheltered while in a RRSP (or RRIF). You only pay tax on the amounts you withdraw from a RRSP (or RRIF).

This is typically in retirement when an individual’s tax rate is lower than in their working years. Unlike a TFSA, your contribution limits to a RRSP are dependent on your earned income over the past year as well as the maximum amount set by the Canada Revenue Agency. For 2019, this is 18% of your earned income to a maximum of $26,500.

Don’t worry if you don’t contribute the maximum amount in one year because the contribution balance carries over to future years, and the government will keep track of your RRSP contribution limit (you’ll also find it each year on your Notice of Assessment from the  CRA).

If you’re considering making a withdrawal before you retire, be sure to check with an advisor to review the tax implications. Typically, as you were not taxed at the time when you contributed to the RRSP, you will have to pay tax on the amount you withdraw from the RRSP. There are two exceptions where you do not have to pay tax on a RRSP withdrawal: the Home Buyer’s Plan and the Lifelong Learning Plan.

These plans allow you to borrow from your RRSP and to help you with a down payment for a home or the costs of returning to school. Still, it’s a good idea to make sure you get all of your information together so that you can make an informed decision.

Choosing the right option for you

Before choosing a government savings plan, make sure to consider your current and future income levels, your short-term and long-term goals, and the flexibility you need to access funds into consideration.

To get started and maximize your savings, G&F Financial Group recommends setting up a regular scheduled contribution to your RRSP and/or TFSA account. You’ll be surprised how much your savings will grow by simply paying yourself first and enjoying compounding returns!

Still unsure as to whether a TFSA or RRSP is best for you? Book an appointment with a Certified Financial Planner who can empower you to make an informed choice on a plan that suits your needs. Visit G&F Financial Group to find out more.