Advice from grandma on using RRSP and TFSA for retirement

Advice from Grandma on the RRSP and TFSA

The RRSP and TFSA are products designed as incentives to save up your bucks. These accounts act as containers for your investments. Inside them, your money can grow and accumulate tax-free.

Someday you will be an old person. Sorry to remind you, but it’s true! Your retirement may seem far away, but it’s never too early to start thinking about it. The earlier you start saving, the more time your contributions have to compound and grow.

The RRSP and TFSA each work a little differently. The OG (Original Granny) breaks them down for us in this video.

If you’re a visual person, you might also find this RRSP and TFSA infographic helpful.

Registered Retirement Savings Plan (aka RRSP)

RRSPs are basically a tax deferral program.

You’ll pay tax on your savings when you withdraw them in retirement. The idea is that you’ll be in a lower marginal tax bracket in retirement than you are in your working years. However, this is not always the case.

RRSP basics:

  • Set up at a financial institution
  • Annual contribution limit is 18% of the earned income you reported in the previous year (up to a maximum of $26,010 for 2017)
  • Deadline to contribute for 2017 tax year is March 1, 2018
  • Contributions are pre-tax
  • Contribution amounts may be deducted from your income tax return
  • Withdrawals of investment income and contributions are taxable
  • Early withdrawals are subject to a withholding tax

Learn more about RRSPs.

RRSP vs TFSA

Tax-Free Savings Account (aka TFSA)

TFSAs are not strictly for retirement savings – they can be used for any savings goal.

TFSAs are flexible. Unlike RRSPs, you don’t need to have earned income to contribute to a TFSA, and there are no age restrictions for making contributions or withdrawals.

TFSA basics:

  • Set up at a financial institution
  • Contribution limit for 2018 is $5,500 (cumulative contribution limit since 2009 is $57,500)
  • Deadline for annual contributions is December 31
  • Contributions are after-tax
  • Contribution amounts cannot be deducted from your income tax return
  • Withdrawals of investment income and contributions are tax-free
  • Withdrawals can be made at any time

Learn more about TFSAs.

Which is better?

Both the RRSP and TFSA have lots to offer when it comes to saving for your retirement. Read RRSP vs TFSA: Which is better? to learn about the pros and cons of each to help you decide which is right for you.

As always, we recommend that you talk to your financial institution to get more specific advice. You’re always welcome to talk to us at Vancity about options relating to your specific situation.

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