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Guest blog written by Mike Travers, Certified Financial Planner
Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) are the main considerations for the vast majority of Canadians but it isn’t always clear which one you should choose. It’s important to understand tax brackets in making the decision but don’t worry; the Certified Financial Planner that you’re working with, or should be working with, can help you. Here’s the general approach to consider, knowing your gross income (the amount you earn before taxes):
- Individual income below $46k, invest using the TFSA
- Individual income greater than $46k but less than $89k, probably RRSP but best to seek advice considering all your financial goals
- Individual income greater than $89k, invest using the RRSP
It really comes down to what you can recapture through an RRSP contribution today versus the amount you will likely pay in the future when withdrawing from that RRSP account. Those who earn less than $46k enjoy a deferral of income in using the RRSP but the tax reduction today will be very close to what is paid out in retirement, so there’s really no great benefit. Utilizing the TFSA at this income will put you ahead over the long-run. Conversely, investing through the RRSP when above an individual income of $89k allows you to recapture tax dollars to utilize today that will LIKELY be greater than the tax paid in retirement when drawing on the RRSP account.
For self-employed individuals who have a corporation, the best advice I can provide is to investigate the merits of investing within your corporation instead of drawing money out to invest in an RRSP or TFSA. One can build a retirement nest egg much more quickly utilizing the corporate structure because after the small business tax rate, there is more money left over to grow and compound in the investment account. New tax policies for business owners are shaping up to be a hindrance but there is still opportunity to utilize the corporation for long-term wealth creation.
It's important to keep in mind that everyone’s situation is different and that it’s best to seek guidance from an expert when maneuvering investments & taxes. Make sure that you receive a holistic review of your situation before making any decisions.
Mike Travers is a Certified Financial Planner based in Dundas and can be reached at email@example.com. He has been helping individuals, families and business owner clients make important investment and financial decisions since 2000.