When it comes to saving for retirement or other goals, Registered Retirement Savings Plans and Tax-Free Savings Accounts are popular tools. But are there times in life when contributing to one account over another could make more sense? Tannis Dawson, High Net Worth Planner, TD Wealth, joins Anthony Okolie to break down some common scenarios.
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* We know both the RRSP and TFSA can help you save for retirement and other goals, with the biggest selling feature being the tax benefits. But are there times in life when contributing and making use of one account over the other might make more sense? Tannis Dawson, a High Net Worth Planner with TD Wealth, joins me now to go through a few different scenarios. And Tannis, welcome. Thanks for joining us today.
* Thank you for having me.
* Let's get into a few of the scenarios. Now, if you're a high income earner, you're probably able to contribute to your RRSP and TFSA pretty equally. But are there reasons to prioritize one over the other?
* Yes. When you're an high income earner, you want to look at what's your marginal tax bracket. And that's a key area to where is it most tax efficient in saving for retirement. So when we look at an RRSP, we get a deduction at our marginal tax rate. And so if we're over $235,000 in Ontario, we're paying high rate tax. If we think that in retirement, our income is going to be lower, and we might be at a 33% or 37% tax rate, we have a huge tax savings there, never mind the growth benefit.
- And so where a TFSA, we are not getting a contribution deduction on our tax return even though the growth is tax free and always tax free when we pull it out. So for a high income earner, it is usually beneficial to use RRSP first if you have enough tax savings that you have for investments. Then max out your TFSA. Your RRSP will be 18% of your income up to the max amount, which is about $30,000 in 2024 and minus if you have a pension adjustment for a pension, where a TFSA contribution now in 2024, it's $7,000. 2023 was $6,500.
- In an RRSP, we can also do spousal. So we look at, where do we think the spouse's income is in the future? If they're going to be taxed at a lower rate, we can make that contribution now at the high rate and in the future then tax at the low rate. Both of the vehicles can be transferred over tax free. So it's more looking at the marginal tax bracket.
* OK, and what if you're saving to buy your dream home?
* When you're looking at purchasing your dream home, if that's your first time buying a home, you may be able to use your Home Buyers' Plan. And that's giving you $35,000 out of your RRSP that can use to purchase that home. And then you pay it back over 15 years. So 1/15 of it. There's a new product out called First Home Savings Account. And that's another $8,000 that you can put in each year. And how then do you get a deduction on your tax return like an RRSP. The growth is tax free inside of it. And it can rule to buy your house without having to pay tax on that income.
* OK, and what if you're nearing retirement?
* When you're nearing retirement, we really want to do a retirement plan and looking to see what we think your projected income is now versus into retirement and then even on death. When we look at it, we kind of want to make sure that we're kind of in the same tax brackets, if you're married, then your spouse if it's in the same tax bracket. And so maybe contributions to RRSP nearing the end of the years before you go to retire, you might have large RRSP already.
- We want to look to see what those minimum payments that come out of the RRSP are, and does it make sense that we put more RRSP? Or should we be putting more into your TFSA? Because then we have funds. And we know that non-registered funds or TFSAs in retirement help pay for large purchases like a car, and you would want to pull out. Or versus an RRSP, you'd be pulling out a larger chunk of change, paying tax on that.
- So your plan is key to show what you should be doing kind of near retirement. Also, if you have any large payments that might come out of a pension, the RRSP deduction we might want to save and apply that in the year that we retire.
* And what if you plan to leave a financial legacy?
* So people leave legacies of either to their children, to bequests, or to charities. And so as we said, RRSPs are fully taxable when you take the money out. And so if you're wanting to leave it to a charity, we can donate it to a charity.
- We get the tax deduction that offsets the RRSP. So it is a very tax-efficient way to deal with your RRSP. RRSPs can transfer to a spouse tax free-- and then it's taxable as the spouse takes money out-- or to a dependent child. But if RRSPs are left to your children over 18, and they don't meet any of the exemptions, they're fully taxable.
- A TFSA can transfer to a spouse and continue to grow. And they don't need their own room on it. TFSAs left to anybody else, it will be taxable from the date of death until it's transferred over to them. And then it's cash paid money to them going forward.
* Finally, it's important to speak to someone, correct?
* Yes. You should speak to your investment advisor. They are very up to date on the investment rules, the income tax, the estate, any of retirement planning. And they also work with professionals and other specialists to help prepare your plan and make sure that you are investing during the years of working and in retirement of taking your money out in the most tax-efficient way. So the key here is really investing consistently either in the RRSP, TFSA or your non-reg or home savings accounts and having that plan and working each year with your investment advisor.
* Great information as always, Tannis. Thanks for joining us.
* Thank you for having me.
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* We know both the RRSP and TFSA can help you save for retirement and other goals, with the biggest selling feature being the tax benefits. But are there times in life when contributing and making use of one account over the other might make more sense? Tannis Dawson, a High Net Worth Planner with TD Wealth, joins me now to go through a few different scenarios. And Tannis, welcome. Thanks for joining us today.
* Thank you for having me.
* Let's get into a few of the scenarios. Now, if you're a high income earner, you're probably able to contribute to your RRSP and TFSA pretty equally. But are there reasons to prioritize one over the other?
* Yes. When you're an high income earner, you want to look at what's your marginal tax bracket. And that's a key area to where is it most tax efficient in saving for retirement. So when we look at an RRSP, we get a deduction at our marginal tax rate. And so if we're over $235,000 in Ontario, we're paying high rate tax. If we think that in retirement, our income is going to be lower, and we might be at a 33% or 37% tax rate, we have a huge tax savings there, never mind the growth benefit.
- And so where a TFSA, we are not getting a contribution deduction on our tax return even though the growth is tax free and always tax free when we pull it out. So for a high income earner, it is usually beneficial to use RRSP first if you have enough tax savings that you have for investments. Then max out your TFSA. Your RRSP will be 18% of your income up to the max amount, which is about $30,000 in 2024 and minus if you have a pension adjustment for a pension, where a TFSA contribution now in 2024, it's $7,000. 2023 was $6,500.
- In an RRSP, we can also do spousal. So we look at, where do we think the spouse's income is in the future? If they're going to be taxed at a lower rate, we can make that contribution now at the high rate and in the future then tax at the low rate. Both of the vehicles can be transferred over tax free. So it's more looking at the marginal tax bracket.
* OK, and what if you're saving to buy your dream home?
* When you're looking at purchasing your dream home, if that's your first time buying a home, you may be able to use your Home Buyers' Plan. And that's giving you $35,000 out of your RRSP that can use to purchase that home. And then you pay it back over 15 years. So 1/15 of it. There's a new product out called First Home Savings Account. And that's another $8,000 that you can put in each year. And how then do you get a deduction on your tax return like an RRSP. The growth is tax free inside of it. And it can rule to buy your house without having to pay tax on that income.
* OK, and what if you're nearing retirement?
* When you're nearing retirement, we really want to do a retirement plan and looking to see what we think your projected income is now versus into retirement and then even on death. When we look at it, we kind of want to make sure that we're kind of in the same tax brackets, if you're married, then your spouse if it's in the same tax bracket. And so maybe contributions to RRSP nearing the end of the years before you go to retire, you might have large RRSP already.
- We want to look to see what those minimum payments that come out of the RRSP are, and does it make sense that we put more RRSP? Or should we be putting more into your TFSA? Because then we have funds. And we know that non-registered funds or TFSAs in retirement help pay for large purchases like a car, and you would want to pull out. Or versus an RRSP, you'd be pulling out a larger chunk of change, paying tax on that.
- So your plan is key to show what you should be doing kind of near retirement. Also, if you have any large payments that might come out of a pension, the RRSP deduction we might want to save and apply that in the year that we retire.
* And what if you plan to leave a financial legacy?
* So people leave legacies of either to their children, to bequests, or to charities. And so as we said, RRSPs are fully taxable when you take the money out. And so if you're wanting to leave it to a charity, we can donate it to a charity.
- We get the tax deduction that offsets the RRSP. So it is a very tax-efficient way to deal with your RRSP. RRSPs can transfer to a spouse tax free-- and then it's taxable as the spouse takes money out-- or to a dependent child. But if RRSPs are left to your children over 18, and they don't meet any of the exemptions, they're fully taxable.
- A TFSA can transfer to a spouse and continue to grow. And they don't need their own room on it. TFSAs left to anybody else, it will be taxable from the date of death until it's transferred over to them. And then it's cash paid money to them going forward.
* Finally, it's important to speak to someone, correct?
* Yes. You should speak to your investment advisor. They are very up to date on the investment rules, the income tax, the estate, any of retirement planning. And they also work with professionals and other specialists to help prepare your plan and make sure that you are investing during the years of working and in retirement of taking your money out in the most tax-efficient way. So the key here is really investing consistently either in the RRSP, TFSA or your non-reg or home savings accounts and having that plan and working each year with your investment advisor.
* Great information as always, Tannis. Thanks for joining us.
* Thank you for having me.
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[MUSIC PLAYING]