WHICH WILL HELP YOU ACHIEVE YOUR 2019 FINANCIAL GOALS?
It’s that time of year again. Our waistbands are a little snugger, our wallets a little lighter, and our hearts and minds are (mostly) still committed to the resolutions we’ve set for the year ahead.
The new year is a great time to reflect on the past and set meaningful goals for the future. It’s the season of self improvement, and your Facebook feed is likely overflowing with offers to help you achieve your ambitions or overcome your insecurities. Whether you want to fit into your skinny jeans or bring some semblance of order to your crazy life, there are an endless number of products and services to choose from — all promising to help you achieve your dreams in a handful of simple steps. It’s no wonder most people have given up on their resolutions by now — it’s nearly impossible to decide where to start!
If your goal is to improve your financial health in 2019, you may be feeling similarly overwhelmed. Do you save first or do you invest? How much can you afford to set aside? How long is this going to take?
Here’s the good news — we really can help you achieve your financial goals, with an easy-to-follow plan. We’ll help you choose the right product to build your savings. And, we’ll start by answering that one question you’ve always wondered about …
What the heck is the difference between an RRSP and a TFSA anyway?
What is a TFSA?
A Tax-Free Savings Account (TFSA) is more than just a savings account— it’s an investment account. The money you put into a TFSA can be used to purchase a number of eligible investments.
What’s the benefit? Your savings grow tax-free, meaning you don’t have to pay tax on your investment earnings — the interest, dividends and capital gains — when you withdraw your funds. And, you can withdraw your money whenever you need it, without penalty, making this a great savings option for both your short- and long-term savings goals.
How does it work? The government sets a maximum on how much money you can invest through your TFSA each year. The 2019 maximum is $6,000. However, your contribution room accumulates over time, starting all the way back in 2009 when TFSAs were first introduced. This means that if you have yet to contribute to a TFSA, you could invest up to $63,500 in one by the end of this year. The amount you’re allowed to invest will continue to grow year over year, whether you deposit money or not.
What else do you need to know? There are no limits to how much your money can earn in your TFSA; that all depends on the length and type of investments you choose. However, as mentioned, the government does limit how much you can put in. And if you go over these limits, you’ll be hit with some fairly significant penalties.
Plus, although you can withdraw your money whenever you want, you have to wait until the start of the next year to put that money back in.
What is an RRSP?
A Registered Retirement Savings Plan is a tax deferred account that’s registered with the federal government. As the name suggests, RRSPs are intended for retirement savings.
What’s the benefit? You can claim the amounts you contribute to your RRSP as a tax deduction. This means you won’t pay tax on this income or the money you earn on your investment until you withdraw those funds.
Plus, by the time you’re ready to withdraw your money in retirement, you’ll likely be taxed at a lower rate than you are now because it will be based on your retirement income. So ideally with an RRSP, you’ll be able to invest more upfront, earn more over the long-term, and pay less tax on those earnings in the end.
How does it work? With an RRSP, you can contribute up to 18 per cent of the income you’ve earned in the previous year, up to an annual maximum that changes each year. In 2018, this maximum is $26,380. Like a TFSA, you can put RRSP funds into a number of eligible investment products.
What else do you need to know? You can access RRSP funds before your retirement if needed, but there are withdrawal rules and tax implications you’ll need to be aware of before making that decision. You’re also slightly more limited on the types of investments that you can hold in an RRSP versus other products, although there are still plenty of options to allow you to match your investments to your financial goals and your risk comfort level.
Finally, you need to stick within those yearly contribution limits or you’ll be penalized by the CRA.
Choosing the right savings strategy
If you can afford to maximize your contributions to both an RRSP and a TFSA, that’s great! We encourage you to take advantage of both options. But if you need to balance your approach to better fit your budget, that’s fine too. The most important thing is to choose the product that works best for your financial goals.
There are many different things you’ll need to consider when deciding how much to invest through a TFSA or RRSP, like your age, current income, other sources of retirement savings and, of course, the personal financial goals you want to achieve. You can start figuring out which option is best for you by checking out our TFSA vs RRSP calculator.
And, when you’re ready, our Wealth Advisors are here to help. Remember -- they exist to help your wealth grow, and they’re excited to work with you to explore investment options and opportunities to meet your unique needs. Why? Because our goal this year is to support you in reaching your financial goals.
So, look out 2019! Together, we’ve got this.
If you want to discuss further or have any comments reach out here