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RRSP and TFSA How to Save for Retirement 

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RRSP and TFSA How to Save for Retirement 

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By:Christian MacDonald

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This video explains what TFSA are and how they work in the financial sector in an easy to understand infographic. I found this video important because it provided multiple useful tips on TFSA that the average individual wouldn’t know, such as individuals can hold multiple TFSA in their name and that you do not need to go to a bank to open a TFSA. The easy to understand infographic effectively explains contribution limits and contribution room with real life examples. I decided to share this video because I found the easy to follow infographic effective for visual learners like myself that have difficulty understanding traditional teaching methods.

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What is a Tax-Free Savings Account (TFSA)?

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This video gives examples of real scenarios that show how RRSP can be beneficial to individuals who pay large percentages of income tax. I choose this video because it shows a real comparison between two individuals who make different income amounts but pay the same amount in income taxes because the individuals are savvy enough to utilize this retirement savings tool. I choose this video because it gives realistic income levels that individuals can relate to and connect their personal financial situation with.

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How does an RRSP contribution reduce your income tax?

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This article written by Money Sense is a helpful tool in predicting how much you should expect to save for retirement to live a comfortable lifestyle. I found this article interesting because it highlights at what age you should start saving and making contributions to an RRSP and how much your contributions should be. For individuals who are not financially savvy this article provides a chart that gives realistic goal expectations for each decade of your life that if followed could aid in saving for a comfortable retirement.

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It depends on how luxurious a retirement you want. To get a rough idea, start by adding up how much annual income you think you'll need in retirement; then subtract the amount of money you expect to get from your company pension, Canada Pension Plan and Old Age Security. Then multiply that amount by 30. That's how much you need to have saved by the time you retire, says Jim Otar, founder of RetirementOptimizer.com.

Here's an example: You and your spouse are together earning $100,000 a year. Most retirees can live comfortably on half their pre-retirement income. That's $50,000. Many couples in that situation will get about $33,500 a year in retirement income from the Canada Pension Plan, workplace pensions and Old Age Security, so you'll need an additional $16,500 a year from your own savings. Multiply that by 30 and you get close to $500,000. That's the amount you need to have banked by the time you retire.

How do you know whether you're on track to reach your goal? The chart below offers some sample numbers, based on a few realistic assumptions. The first is that in the early years of your career, RRSPs won't be a priority. If you're in your 20s, you're probably too busy going to school and getting your career started to contribute. Any extra money you do earn should go towards paying down debts. By your early 30s, the mortgage, cars and kids are weighing you down. It's okay to skip RRSP contributions during these years too, says Malcolm Hamilton, an actuary with Mercer, a human resources and consulting group-as long as you don't make the mistake of overspending and digging yourself deep into debt.

Once you're in your mid-30s, it's time to start attacking those RRSPs. To reach the $500,000 goal (in today's dollar), you and your spouse would have to start putting $10,500 a year into your RRSPs at age 35. These calculations are based on a 5% annual return and yearly contributions that rise 2% annually to keep pace with inflation. Don't fret if this timetable sounds ambitious. Even if you can't come up with $10,500 every year in your 30s, you'll probably be able to catch up in your 50s with larger contributions. By then, your mortgage should be paid off and the kids finished university. That's when you need to get really serious about putting money into RRSPs if you want to make that $500,000 target.

AGE | VALUE OF RRSP
25 $0
35 $0
45 $121,500
55 $283,500
65 $500,000

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It depends on how luxurious a retirement you want. To get a rough idea, start by adding up how much annual income you think you'll need in retirement; then subtract the amount of money you expect to get from your company pension, Canada Pension Plan and Old Age Security.

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Contribute to your RRSP, reduce your taxes!

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Contribute to your RRSP, reduce your taxes!

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This graphic is a simple yet effective way to explain how RRSP can lower your taxes well increasing the principle invested into the RRSP.

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This article written by the financial post gives many helpful tips on the rules of TFSA. I chose this article because of its easy to read nature that could benefit anyone who is new to investing saving. The author covers important information from the history of TFSA to the lifetime contribution limit and rules and regulations everyone should know before investing. This article is particularly useful because it compares TFSA to RRSP and other investing options such as foreign investments and stock investments.

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The tax-free savings account is starting to grow up.

Introduced in the 2008 federal budget and coming into effect on Jan. 1, 2009, the TFSA has become an integral part of financial planning in Canada, with the lifetime contribution limit set to reach $52,000 in 2017, provided you were 18 at the time it came into existence.

Clay Gillespie, a financial advisor and managing director of Vancouver-based Rogers Financial, says the TFSAs have become portfolios unto themselves and that's changed everything in his world.

"I remember when you just had $5,000 and you really couldn't do anything with them. Now you see portfolios with $60,000 to $70,000 for each husband and wife if they have been maximizing their contribution," he said, referring to some of the gains clients have made beyond their contributions.

Gillespie is now using the TFSA to draw an income for some of his retired clients. All the gains made in the TFSA are tax-free, and so are withdrawals - but more importantly the money coming out of the account does not count as income in terms of the clawback for Old Age Security, which starts at $74,780 in 2017.

He says the TFSA has also become a great vehicle for dealing with a sudden influx of wealth. "We've had people who all they had was registered money (like in an RRSP) and then they sell their house or they get an inheritance," says Gillespie.

The advisor says one of the biggest problems with the accounts is that Canadians don't actively invest in their TFSAs.

"It was marketed as a savings account," he says, which is how too many people treat them, thereby missing out on the potential for tax-free compounding.

With that in mind, and the new year limit increase upon us, here are eight things Canadians need to know about TFSAs.
How did we get to $52,000?
The first four years of the program, the annual contribution limit was $5,000 but that increased to $5,500 in 2013 and 2014 under a formula that indexes contributions to inflation. The Tories increased the annual contribution limit to $10,000 in 2015 but the Liberals quickly repealed that when they came into power and reduced annual contributions to $5,500 for 2016, still indexed to inflation. The annual number increases in increments of $500 but inflation was not riding high enough to boost the annual figure to $6,000 for 2017 so we are stuck at $5,500. That brings us to the current $52,000. The good news is even if you've never contributed before, that contribution room kept growing based on the year in which you turned 18.
Eligible investments
For the most part, whatever is permitted in a RRSP, can go into a TFSA. That includes cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates, bonds and certain shares of small business corporations. You can contribute foreign funds but they will be converted to Canadian dollars which cannot exceed your TFSA contribution room.
Unused room
As the TFSA limit has grown, so has the unused room in Canadians' accounts. A poll from Tangerine Bank in 2014 found that even after the Tories increased the annual limit, a move that ended up as one-time annual bump, 56 per cent of people were still unaware of the larger contribution limit. In 2015, only about one in five Canadians with a TFSA had maximized the contribution room in their account, according to documents from the Canada Revenue Agency.
Withdrawal and redeposit rules
For the most part, you can withdraw any amount from the TFSA at any time and it will not reduce the total amount of contributions you have already made for the year. The tricky part is the repayment rules. If you decide to replace or re-contribute all or a portion of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room. Otherwise you must wait until Jan. 1 of the next year. The penalty for over-contributing is 1 per cent of the highest excess TFSA amount in the month, for each month that the excess amount remains in your account. "The scary part is if you withdraw on Jan. 1 and give it back Jan. 2 and forget all year you'd be over-contributing at one per cent all year," says Rocco Mocella, head of network for Quebec and Atlantic Canada, retail banking wealth management, HSBC Bank Canada
Is the Canada Revenue Agency still auditing TFSAs?
The Canada Revenue Agency continues to investigate some Canadians - less than one per cent - who have very high balances in their accounts. Active traders in speculative products seem to be the main trigger. Tim Clarke, a Vancouver-based lawyer, is litigating a case with Moodys Gartner and expects his appeal of the current rules regarding TFSA investments to be heard in February.
Be careful on foreign investments
If a stock pays foreign dividends, you could find yourself subject to a withholding tax. Jamie Golombek, managing director, tax & estate planning with CIBC, said while in a non-registered account you get a foreign tax credit for the amount of foreign taxes withheld, if the dividends are paid to your TFSA, no foreign tax credit is available. "For U.S. stocks, while, there is an exemption from withholding tax under the Canada-U.S. tax treaty for U.S. dividends paid to an RRSP or RRIF, this exemption does not apply to U.S. dividends paid to a TFSA," he says.
What are people investing their TFSA in?
Gillespie says people are still heavily into cash and close to cash holdings. A study from the Royal Bank of Canada two years ago, found 44 per cent of holdings in TFSAs were in a high interest savings accounts. Another 21 per cent were in guaranteed investment certificates. "You want to see your money grow but you also have to respect your risk tolerance," said Mocella. "You want to look at your investment horizon."
TFSA vs RRSP
"It's hard to generalize" says Mocella, about which is better for a typical Canadian. RRSPs are generally geared towards reducing your taxable income when your marginal rate is high and then withdrawing the money in retirement when your income will theoretically be much lower. The answer is easy if you make $10,000 a year and you're a young person - the TFSA is better - but Mocella says salaries and the deduction you get from RRSP contributions are only part of the equation. "It also depends on the flexibility that you are looking for. Once you get to the higher marginal rate that deduction is attractive but nothing stops you from taking that deduction and putting it in a TFSA and getting the benefit of both."

Financial Post
gmarrnationalpost.com
twitter.com/dustywallet

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Eight things you need to know about your TFSA to maximize your money

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The tax-free savings account is starting to grow up. Introduced in the 2008 federal budget and coming into effect on Jan. 1, 2009, the TFSA has become an integral part of financial planning in Canada, with the lifetime contribution limit set to reach $52,000 in 2017, provided you were 18 at the time it came into existence.

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This video is a helpful tool to utilize in the decision of which saving method would be best for the watcher. The video explains what savings plan should be used depending on what the financial goal. I also found this video helpful because it explained key rules of RRSP that I didn’t already know such as RRSP can be used for the lifetime education savings plan or for the purchase of your first house. I would recommend this video to individuals who are confused about which savings method best suits their financial goals.

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The difference between RRSP and TFSA are explained with words and pictures in this graphic in an easy to understand flow. I found this picture uniquely useful for visual learners who have a hard time understanding complex written ideas.

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This graphic shows a real-life example of how much an RRSP can save you in deductibles for each level of income.

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This article explains more in-depth concepts on how to maximize the efficiency of a TFSA using diversification and ETF strategies. These concepts are more advanced as it combines multiple saving methods in one portfolio to maximum annual return. I found this article particularly interesting because it explained how to get bigger returns using riskier investment strategies and how to mitigate that risk by utilizing TFSA. This article also explains important tips such as that USA based ETF’s should not be utilized in TFSA because it is not part of the tax treaty between nations and could cost investors large amount in taxes.

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Canadians love their tax-free savings accounts and exchange-traded funds. More than 12.7 million people had a TFSA in 2015, an increase from the previous year of about 1 million.

At the same time, Canadians are putting more money into ETFs: $26-billion last year, a record-breaking figure that pushed total ETF assets in Canada to $147-billion, according to research by the National Bank of Canada.

But put the two together? The idea of investing in ETFs inside a TFSA is "still not top of mind" for most people, says Paul Shelestowsky, a senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.

Perhaps it's the name that makes many Canadians think of TFSAs simply as a place to earn a bit of interest income on cash, he adds.

"We have a lot of people with TFSAs as their online savings account, earning 1.4 per cent," says Mr. Shelestowsky. "I tell them that they really want to be maximizing returns in their tax-free account, and anything that's not paying big interest they can have outside a TFSA."

There's good reason to load up a TFSA with ETFs, says David Kletz, vice-president and portfolio manager at Kelowna, B.C.-based Forstrong Global Asset Management Inc. With their ready-made basket of assets, ETFs provide a quick way to diversify investments within a TFSA.

It's also a cheaper way to build a diversified portfolio, says Mr. Kletz.

"You get access to so many companies in one fell swoop, which can mitigate trading costs," he says. "Diversification really is key to successful investing, and with ETFs, you can diversify your TFSA not just in terms of concentration on a stock-by-stock basis, but also in terms of diversifying globally and across asset classes."

For investors who have yet to open a TFSA, the accumulated maximum contribution room of $57,500 is a good starting base for a portfolio, says Mr. Kletz. Those who have maxed out their RRSPs can use the TFSA for investing with the added benefits of tax-free returns and withdrawals.

Because of the tax-free nature of a TFSA, it makes sense to choose ETFs with higher growth potential, says Mr. Kletz.

"For example, you might want to look at ETFs that are focused on small caps or on a riskier side of the tech industry - stocks that have a lot of upside but might be highly risky," he says. "These would be ideal in a TFSA to tax-shelter the gains."

Larry Berman, chief investment officer at ETF Capital Management in Toronto, says putting riskier ETFs in a TFSA can be a smart move for Canadians who have other investments, such as those held in an RRSP, to support their retirement strategy. "You don't want to speculate in your RRSP, but if a TFSA is another source of retirement savings for you, then yes, it makes sense to put the riskiest part of your portfolio in your TFSA," he says.

In such cases, investors should consider globally focused ETFs with strong growth potential, says Mr. Berman. As examples, he points to emerging-markets ETFs from BMO, iShares and Vanguard. "Emerging markets are quite undervalued relative to the U.S. market, which is overvalued," he says. "Any one of those ETFs would provide an ideal, broad-based exposure to emerging markets."

ETFs that focus on niche sectors such as health care and biotechnology would also be well suited to a TFSA, says Mr. Berman. "I love ETFs because one of the hardest things to do in investing is getting rid of idiosyncratic or company-specific risk," he says. "When you're investing in a niche sector within an ETF, you don't have to worry about being an expert who's having to choose one or two companies to invest in."

Canadians who have been using their TFSAs as a haven for cash and are now ready to push the envelope might consider a bond-based ETF, says Jay Nash, senior vice-president and investment advisor at Toronto-based National Bank Financial Wealth Management. A few examples are Vanguard's Canadian Short-Term Corporate Bond Index ETF (VSC) or Horizons' Active Corporate Bond ETF (HAB).

"A TFSA will offer the same tax shelter for fixed-income securities," says Mr. Nash. "There are those who might be wanting to get as much growth as they can out of the ETFs in their tax-free savings account, and there's nothing wrong with using your TFSA that way if you favour high yield, but it all depends on your risk profile."

Ed Rempel, a fee-for-service certified financial planner in Toronto, says a TFSA should not include U.S.-listed ETFs that pay dividends. Because TFSAs are not recognized by the income tax treaty between Canada and the United States, dividends from these funds are subject to a withholding tax of 15 per cent. A double whammy applies to TFSA-housed, U.S.-listed ETFs with international equities that pay dividends; these would be subject to an additional withholding tax.

"So it's better to have these funds in your RRSP, which is recognized by the tax treaty," says Mr. Rempel, who writes the blog Unconventional Wisdom. "But if you do want to buy international equities for your TFSA, then you should buy Canadian-listed ETFs that hold international stocks."

While TFSAs continue to attract more investors because of the tax-free benefits, Mr. Rempel cautions against letting the "tax tail wag the investment dog."

"There are certain ETFs that work better within a TFSA than others, but usually where you put your investments is the last decision you should make," he says. "Decide first how much you want to invest, what's your risk tolerance and goals, and how you want to allocate your assets. Then once that's all determined, then you decide which type of account you should put your investments in."

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Are you using your TFSA to its full potential?

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Canadians love their tax-free savings accounts and exchange-traded funds. More than 12.7 million people had a TFSA in 2015, an increase from the previous year of about 1 million. At the same time, Canadians are putting more money into ETFs: $26-billion last year, a record-breaking figure that pushed total ETF assets in Canada to $147-billion, according to research by the National Bank of Canada.