RRSPs and TFSAs: Ways to save on a budget
Canada Life - Nov 01, 2020
Matching each saving option to your specific financial situation
Building savings isn’t always easy – after all, there are plenty of fun things to spend money on.
But the satisfaction of watching your savings grow will likely outlast the thrill of your latest online purchase.
To maximize your savings potential, you can add guaranteed investment certificates (GICs), mutual funds, segregated funds, stocks and bonds to your registered retirement savings plan (RRSP) or tax-free savings account (TFSA). As your financial security advisor, I can help you choose investment options that are best suited to your needs.
Accelerate your savings
Here are a few options you can consider to make the most of your contributions:
1. Pay yourself first with a pre-authorized chequing contribution plan
A pre-authorized chequing (PAC) contribution plan helps you make regular, automatic contributions to your investments. It’s the idea of “paying yourself first” by treating regular saving like any re-occurring payment. This strategy is more effective because contributing more frequently gives you the advantage of dollar-cost averaging.
We can also talk about adding an option that gradually increases the amount you contribute over time. It’s like giving your investments an annual raise, which can make a big difference to your savings over time.
2. Catch up on unused RRSP contribution room with an RRSP loan
An RRSP loan can enhance your savings by allowing you to catch up on RRSP contributions. By catching up on contributions using a loan, you’re giving your investments the most available time to grow. It helps you now and in the future because it:
- Gives you more money earlier to grow your investment.
- Potentially creates a larger nest egg down the road.
- Reduces this year's tax bill through an income deduction equal to the amount of your allowable RRSP contribution.
Borrowing your RRSP contribution doesn’t have to be expensive and you can use any tax refund to help pay down your RRSP loan. This means you’re benefitting from tax advantages right away.
Despite the advantages, RRSP loans aren’t right for everyone.
3. Contribute to a spousal RRSP
In a spousal RRSP, the higher income spouse makes an RRSP contribution and claims the tax deduction but the other spouse owns the plan and the money in it. Spousal RRSPs are generally used to equalize income during retirement, reducing the overall family tax rate.
This type of plan can be an advantage if one spouse earns a lot more income than the other. Any contributions made by the higher income spouse will reduce their individual RRSP contribution room for the year, but won’t affect how much the lower income spouse can contribute to their individual RRSP.
If money is withdrawn within three years of contributing to the spousal RRSP, all or part of this amount will be taxed as income to the spouse who made the contribution. Your financial security advisor or investment representative can help you understand how a spousal RRSP can impact your individual RRSP contributions.
Find out ways to use your RRSP or TFSA savings for more than just retirement.
Learn more about the basics of RRSPs and TFSAs.
Contact me today to figure out what saving strategy is best for you.