RRSP vs TFSA

A recent BMO Financial Group survey concluded that 40% of Canadians don’t know the difference between a TFSA and RRSP.

Both are effective long-term savings vehicles that used properly, can save you a lot of tax.  They both have some similar attributes but they also have some big differences and each one may be more appropriate for you than the other, depending on your situation.

One of the major differences is that RRSPs (Registered Retirement Savings Plans) have big benefits up front if you have tax to pay.  If you’re in the 30% tax bracket, a $5,000 RRSP contribution will reduce your taxes by $1,500.  By contrast, a contribution to a TFSA (Tax Free Savings Account) doesn’t give you any tax deduction up front.

For both types of accounts, as long as the money remains in the account, hopefully for many, many years, you will not have to pay tax on any growth or income generated on your investments.  If you had your investments outside of either an RRSP or TFSA in a non-registered or OPEN account, you would pay tax each year on any interest, dividends or realized capital gains.

Another major difference is on the back-end – when you withdraw money from your account.  With an RRSP, in most cases you would convert that to a RRIF (Registered Retirement Income Fund) when you retire or, at the latest, in the year you turn 71 and you would start drawing an income from it.  Every dollar you withdraw from an RRSP or RRIF is income and taxable in the year it’s withdrawn.

With the TFSA, because you have already paid the tax on the amounts contributed and it has grown tax-free while in the TFSA, any amounts withdrawn come out completely tax-free.  So, in an emergency, you could withdraw from your TFSA without any tax consequences.  Remember though that the real tax advantages to be had with a TFSA are over the long term.

So which plan is the best for you to contribute to?  Much of that depends on your taxable income.  If you are in a high tax bracket, a contribution to an RRSP will give you a good immediate tax break.  If you’re in a lower tax bracket or you won’t have any tax to pay, the TFSA may be best for you.

If you would like more information about either of these options, please contact us at 604-737-8886.

Younger Next Year

I just finished reading the book: “Younger Next Year” by Chris Crowley (a fit 70 year old) and Henry S. Lodge, M.D (a gerontologist and a board certified internist).  The information presented is compelling and inspiring and if you’re between age 45 and 105, I strongly recommend reading this book.

In it the authors show how by following a few simple “rules” of exercise, nutrition and commitment, we can effectively turn our biological clocks back ten years or more and live healthy, vibrant and exciting lives well into our eighties and nineties.  They claim that over 50% of all illness and injuries in the last third of our lives can be eliminated by making these lifestyle changes.

We all know that exercise and proper nutrition are important to our health. Being involved and caring are equally important. Understanding how it all works and the impact on our health of that food, exercise and connecting with others can give us the motivation to do something about it.

The rules are pretty simple: exercise six days a week for the rest of your life – four days of serious aerobic exercise and two days of strength training; quit eating crap; and stay connected and involved with other people and with causes you care about.

There are two books – one written primarily for men and the other written for women (“Younger Next Year for Women”).  The financial planning we do is so that you can achieve financial independence and be financially prepared for life after work.  In order for that life to be truly fulfilling, it’s important to be healthy.  Reading this book and following what is says can give each of us a better chance at that.

The Goose That Laid The Golden Eggs

When saving for retirement (or financial independence) and building up your nest-egg, it’s easy to think about the amount saved as a resource of cash to be used rather than a block of capital that will generate income for you. There’s a big difference.

If you decide that you will never touch the principle but will only use the earnings generated, it can last throughout your life. But if you draw on the principle for income, eventually your nest-egg will be depleted.

Remember Aesop’s fable: “The Goose That Laid the Golden Eggs”?

A husband and wife owned a goose that would lay one golden egg every day. This made them quite well-off.

But one day they decided that one golden egg a day wasn’t enough. They thought that if they could just get all the golden eggs at once, they would be rich.

So, they killed the goose and cut her open, only to find that she had no golden eggs inside of her, and their source of golden eggs was now gone.

Think of your retirement nest-egg as that goose that lays the golden eggs, and keep the goose alive.

Just Do It

I’ve known for a long time that doing a regular blog would be a great way to keep our clients up to date on what’s going on with our company, the financial industry and mostly to share thoughts and ideas regarding financial planning.

But knowing it and doing it are two different things. There’s a lot of work involved in learning how to set up and manage a blog on our website.  And there’s the time factor - how do we incorporate this into everything else we do without it consuming all our time?

After spending considerable time thinking about it and going back and forth on whether it’s practical, ultimately the truth is, if it will add value to you our clients and our relationship with you, then it’s worth doing or at least trying.

In thinking this through it occurred to me that often times, getting serious about financial planning is like that. We can spend too much time thinking about it and wondering if it’s even practical or if we have the time to do it but at the end of the day, we know it will add value to our lives as we get our financial houses in order and so it most definitely is worth the effort.

So here we go.  Hopefully you’ll find the time you spend reading this blog worthwhile.