Personal finance can feel overwhelming. Not only can the concepts and rules be challenging, everyone’s situation is also unique: One logical money decision for one individual could be an inappropriate move for another person. And there can be a lot riding on your decisions: your retirement, your children’s education and your lifestyle may be at stake.
At each stage of life not only do your life goals shift but so too does your financial focus. At age 25, budgeting may be your most important concern. At age 50, your investing strategy may dominate your thinking. Fortunately, a greater knowledge of finances can allow you to make more informed choices.
So, before you make your next money move, here’s a chance to gauge your financial knowledge. This can help you figure out what you already know and what you may still need to learn.
1 What percentage of your annual income can be contributed to your Registered Retirement Savings Plan (RRSP)?
B 18% of your income, with some exceptions1
C 10% of your net worth
RRSPS can be a great method to benefit you now and in the future. RRSP contributions can lower your taxable income and even help contribute to a tax refund annually. With annual contributions over time, investments within an RRSP can provide a method of compounding savings to fund your retirement years. You can continue to contribute to an RRSP until the end of the calendar year when you reach the age of 71.
2 When do you pay tax on a withdrawal from a Tax-Free Savings Account (TFSA)?
B It depends on your RRSP contributions
C It depends on the spousal contribution
D You will not pay tax on a TFSA withdrawal
TFSAs help you manage tax in different ways. Within a TFSA, investments grow tax-free and there is no tax on withdrawal. TFSAs represent one method of saving money for short- or long-term goals, and you can also choose from a wide range of investments.
3 Parents, how old does a child have to be to have a Registered Education Savings Plan (RESP) set up for them?
B One year old but younger if their sibling has an RESP
C No age minimum so long as the child has a Social Insurance Number
D No age minimum as long as a parent has an RRSP
The fact that you can begin contributing to an RESP at year one of a child’s life means you have a number of years to contribute to your child’s education before they actually need to use the funds. The Canada Education Savings Grant is also available to a maximum $2,500 annually (up to $7,200 in total).
4 Any withdrawal from your RRSP prior to retirement is penalized.
There are two specific circumstances where you may take funds from your RRSP without penalty. The Home Buyers Plan (HBP) and the Lifelong Learning Plan (LLP) allow you to use a portion of your RRSP savings to help fund your first home or post-secondary education. Essentially, you are providing yourself an interest-free loan, because the money must be repaid to the RRSP over a specific period of time (HBP must be repaid over 15 years; LLP over 10 years). A maximum of $35,000 may be taken from your RRSP for the HBP. The LLP permits you to withdraw $10,000 per calendar year with a maximum of $20,000.
5 When there is economic uncertainty, avoiding the stock market is the best method to keep your money safe over the long term.
Not being in the market, or trying to time the market, may have a negative influence on your investments. During economic uncertainty, some investors may panic and liquidate their investments in the hope they can avoid a market sell-off. TD Asset Management Inc. (TDAM) published an article noting what may happen when investors try to time the market and are on the sidelines during periods of growth: If you had missed out on 1% of the best market days between 1989 and 2019, your portfolio would have provided a significantly lower performance. You can read more about, The power of staying invested.
6 The process of allocating funds to specific categories to pay bills, manage debts, save for longer-term goals or build up an emergency fund is called:
B A budget
C A mortgage
A budget is a method to help you manage your money and guide your spending and saving activities. A budget can indicate where your funds are coming from, and when bills will need to be paid. You can even use online tools, such as TD MySpend, to help track your spending in real time. It can help give you more control over your money and show where you can cut costs or save more.
7 Fact check: At age 60, you must withdraw your investments from your TFSA.
B No, but you must withdraw 7% per year
C No, but you must make an entire withdrawal at age 65
D No, there is no age limit on when you need to withdraw funds
One of the valuable aspects about TFSAs is that there is no age maximum when you must stop contributing. As well, you never lose contribution room if you don’t add to your TFSA one year. In fact, even if you make a withdrawal, that withdrawal amount will be added back to your TFSA contribution room at the beginning of the following year. Knowing how best to utilize registered accounts like RRSPs, TFSAs and RESPs can ease some of the anxiety around long- and short-term financial goals such as retirement, saving for a child’s education and other goals. Making time to do your own research can help you become more financially literate — and can provide benefits to your financial well-being.
- Your annual contribution limit is related to how much you earn. In 2021, the RRSP contribution limit is 18% of your previous year’s earned income, up to the maximum amount of $27,830 (a number set each year by the government), plus previous unused contribution room less any pension adjustments ↩