Using RRSP’s and TFSA’s as Long-Term Savings Options

1
Using RRSPs and TFSAs as Long-Term Savings
Options
2

• What opportunities do Canadians have to make
  their extra money go the furthest for them?
  Saving for the future is one of the best
  decisions an individual can make, but there is
  more than one way to make your money work for
  you. When investing in the stock market, there
  are countless ways to do this in this article,
  we will discuss the three most common ways to
  hold stocks Registered Retirement Savings Plan
  (RRSP), Tax Free Savings Account (TFSA), and an
  unregistered account (sometimes called an Open
  account).

3

• At Kent Accounting, when we talk to clients about
  how to maximize their money, we often talk about
  TFSAs and RRSPs, as well as Open accounts. In
  the opinion of Kent Accounting, the strongest tax
  deduction available for Canadians is through
  investing in an RRSP. RRSPs provide immediate
  tax relief, continued tax-free growth, as well as
  peace of mind and financial security for the
  future. Like many Canadians, you may not realize
  that the largest expenditure you will make in
  your life is not real estate investments, but in
  fact, your taxes. There are a number of types of
  savings accounts that can help alleviate your
  yearly tax bill and help you save for retirement,
  and today well be exploring two of the most
  popular.

4

• One of the most common and well-known savings
  opportunities is a Registered Retirement Savings
  Plans (RRSP). For every dollar that you
  contribute to an RRSP, the government will credit
  you at the highest tax rate you are currently
  paying. For example, at a salary of 70,000 per
  year, you would receive 305 back for every
  1,000 RRSP contribution you make, making RRSP
  contributions a great way to manage the amount of
  tax you will be paying. Note that the refund
  amount fluctuates as you contribute more/less or
  earn more/less, so be sure to discuss this with
  your small business accountant.

5

• The Government of Canada provides you with RRSP
  room equal to 18 of your earned income each
  year. In 2016, the maximum an individual could
  contribute to an RRSP was 26,010. If in years
  past, savings goals have lead you to put your
  money elsewhere, not to worry any unused RRSP
  room from previous years is rolled over and
  accumulated, meaning you might have more
  opportunity to invest in your RRSPs than you
  realize.A

6

• There are some drawbacks with RRSPs that are
  important to consider. While you do not pay any
  tax on the growth of RRSPs, you do pay tax on
  withdrawals, and from a tax perspective, it is
  far wiser to withdraw from your RRSP during your
  low-income years (retirement). When you withdraw
  from your RRSP, not only are you taxed, but you
  also lose any accumulated room in your total
  investment pool, meaning you cannot replace those
  monies in the future.
• At 71, all Canadians must convert their RRSPs to
  Registered Retirement Income Funds, which provide
  you with yearly income. Heres an example of what
  your retirement plan could look like if you take
  advantage of your RRSP opportunities.

7

• If at age 35, you begin to contribute 5,000 a
  year to your RRSP, by your 71st birthday, you
  would have 1,070,259 (assuming 7 rate of return
  and all tax refunds reinvested). If you invested
  in a regular investment account, on your 71st
  birthday, this same yearly investment would
  amount to 509,195 (assuming the same rate of
  return as the RRSP). That is 561,064 more in
  your RRSP account, which is more than double the
  return on investment.
• Roughly half of Canadians do not contribute to
  their RRSPs, which is a huge missed opportunity,
  both regarding the ability to save for a happy
  and fiscally healthy retirement and the
  opportunity for yearly tax savings over the
  course of your life.

8

• RRSPs are a great way to save, but they arent
  your only option. A Tax Free Savings Account
  (TFSA) is an account that has a set amount of
  room per year (in 2017, that set amount is
  5,500, but year over year, that amount does
  fluctuate). While unlike an RRSP, you do not
  receive any tax deductions when contributing, you
  are not taxed on the growth of your investment,
  and you have the flexibility to contribute and
  withdraw at any time.
• Using the same savings example as above, lets
  look at how contributing to a TFSA as a
  retirement savings plan can benefit you.

9

• If you invest 5,000 per year from your 35th
  birthday until your 71st birthday, you will have
  saved 829,752 (assuming 7 rate of return),
  whereas in a regular investment account on your
  71st birthday you would have 509,195 (assuming
  the same rate of return as the TFSA).
  Contributing to a TFSA account allows your
  savings to earn you an additional 320,557.
• Regarding withdrawing funds over the course of
  your life, you do have that flexibility, and you
  do not lose the accumulated room to contribute to
  your TFSA account if you withdraw, you simply
  have a set amount of time to put the funds back.

10

• So how can you decide which account is right for
  you? Determining your primary objective or goal
  for your savings will often point you in the
  right direction.
• If your goal is to save on your yearly taxes and
  save for your retirement, then maxing out your
  annual RRSPs is likely the best course of action.
  If you have the opportunity to borrow funds to
  max out those dollars, it can be worth it.
  Contact Kent Accounting to discuss your best
  borrowing opportunities to maximize your RRSPs.
• If your goal is to save, but youd still like to
  access your funds with plans to put the money
  back into the account, then opt for a TFSA. Call
  Kent Accounting to discuss your potential losses
  and gains in choosing a TFSA over an RRSP.

11

• If you have something specific in mind that you
  are saving for, opting for a TFSA over an RRSP is
  a stronger choice, as you will not lose room in
  your accumulated pool of funds when you withdraw
  those monies and you also wont be taxed on those
  withdrawals. There are two exceptions to this, as
  the Home Buyers Plan allows first-time home
  buyers to withdraw funds from their RRSP for a
  down payment on a property and the Life Long
  Learning Plan allows you to withdraw funds for
  educational opportunities.
• At Kent Accounting, we have found that families
  who properly plan and save for retirement max out
  their RRSP savings year after year, as opposed to
  not planning and hoping for the best. Contact
  Kent Accounting for help devising a detailed and
  fruitful retirement savings plan.

12

• Kent Accounting is a full-service accounting firm
  located in Calgary, Alberta. The firm is led by
  Kent Greaves, a Chartered Professional Accountant
  in Calgary with over 18 years of experience
  working with privately owned companies. Our
  Calgary accountants believe in prompt, accurate
  service at affordable rates. Hiring Kent
  Accounting for your tax planning in Calgary will
  allow you to rest assured and will free up your
  time to engage in your business in the activities
  that you are best at.