RSP or TFSA? Where should you put your money?
Ross McLaughlin and Lisa Green, CTV Vancouver
Published Wednesday, February 24, 2016 6:00AM PST
Last Updated Wednesday, February 24, 2016 8:25PM PST
The deadline for you to invest in an RSP for the 2015 tax year is looming on Feb. 29. But if you’re looking for the best tax savings for you, you might want to consider a number of things including your income.
A Tax-Free Savings Account makes sense if you don’t make a lot of money and a Registered Retirement Savings Plan makes sense if you make more money and are looking to shelter income from taxes.
"If you make under $45,000 a year of income, best to look at a Tax-Free Savings first. And if you make over $45,000 a year of income, look at an RSP," Diane McCurdy from McCurdy Financial Planning told CTV News.
She says if you make less, you might not need a tax shelter and you can carry forward unused contribution room to shelter potentially larger future earnings.
Money invested in a Tax-Free Savings Account grows without any tax implications. You can take it out at any time and none of it is taxed, and because it’s not counted as taxable income there will be no claw backs on government benefits. In 2015, the TFSA maximum was $10,000. In 2016, it will be $5,500 and unused portions can be carried over.
Unused portions of an RSP can also be carried forward. RSP’s allow you to shelter your money for now. You can invest up to 18 per cent of your gross income to a maximum of $24,930 for 2015 but the money becomes taxable in the future when you take it out.
And timing might impact your decision. You can invest in a TFSA anytime but you have to make a decision by Feb. 29 on whether to invest in an RSP.
You should be growing an RSP as part of your plan throughout the year.
"You think: Oh, I should start doing an RSP, I could put $200 a month away,” McCurdy added.
However, if you haven’t done that but still don’t have the money to invest for the 2015 tax year, there is another way. You could borrow the money. Interest rates are low and you could pay down a loan with a potential tax refund.
“Put $200 towards a loan that you could pay off in one year," McCurdy suggests.
She also suggests that you don’t wait to start contributing to a retirement plan. Parents, that means encouraging your kids to file tax returns, if they have part time jobs, even if no tax is owing. That puts all accumulated lifetime income on record with Canada Revenue Agency and starts building unused contribution room to heavily invest in RSP’s in the future when they do have the money to invest.
(CRA Hotline number for contribution room 1-800-267-6999. Link is here.