Canada is the best! Where else in the world can you find wealth building (tax-deferred and tax-free!) financial products like the RRSP and the TFSA. Gotta love being Canadian eh!
What is an RRSP? A Registered Retirement Savings Plan is an amazing wealth building and retirement “savings plan.” It works on a tax-deferred basis. That means; pour money in, watch it grow and don’t pay any tax on it until you take it out. Here are some of the current RRSP criteria and highlights:
- Allowable contributions to an RRSP are based on earned income from the previous year. (The current maximum is 18% or approx. $27,230) Generally this means a paying job, with a real T4. 🙂
- Your RRSP is just an investment “umbrella.” Inside that umbrella you may invest in a variety of different financial products; mutual funds, ETFs, bonds, GICs, company stock, cash etc.
- Depending on your income tax bracket, for every dollar you contribute to your RRSP, you will (in essence) get back xx% on your income tax return. I.E. 30% tax bracket. $1000 RRSP contribution. $300 tax return. (Example only)
- Only pay tax on funds/money that you withdraw from your RRSP.
- Your RRSP days are over by the end of the calendar year in which you turn 71. You normally have 3 common options at this point. 1) Move your funds to an RRIF (Registered Retirement Income Fund). 2) Buy an annuity with some or all of your money. 3) Take all of your money out as a lump sum.
- Check out my “monthly income blog” for an entire section devoted to RRSPs.
What is a TFSA? A Tax Free Savings Account is another (even more amazing!!??) Canadian wealth building and investment product you have to “see and use to believe!”
First introduced in Canada in January, 2009, the TFSA (Tax Free Savings Account) is truly amazing. Like the RRSP, it’s an umbrella savings account that you can use to invest in mutual funds, ETFs, bonds, GICs, company stock, cash and more!
The most significant difference however is: you never have to pay tax on your earnings, capital or growth, ever.
Here are some of the current criteria and highlights of the TFSA:
- Any Canadian 18 years of age or older with a valid SIN number can open a TFSA account.
- Employment income is not a requirement for a TFSA. I.E. Technically, you don’t even need a job to have a TFSA!
- Annual contribution limits are based on fixed dollar amounts and not percentages. Unlike the RRSP, there are “tax refunds” associated with TFSA contributions.
- Everything you contribute to your TFSA and all of your earnings and growth etc. are 100% tax free!
- Unused contributions since age 18 (or 2009) can be carried forward…
- Much more information about TFSAs can be found on my monthly income blog!