As February chugs along, you’re likely being inundated with Registered Retirement Savings Plan (RRSP) ads. The deadline for making RRSP contributions to offset your 2018 taxes is March 1, 2019. But is an RRSP your best option if you want to invest in your future? The answer depends on several variables, including your age, income, marital and family situation, tolerance for risk, and your lifestyle. Here, we cover the basics of common investment options and why you may want to choose one over the other.
Registered Retirement Savings Plans (RRSP)
There are a number of reasons why people may use this option to invest in their future, but the most significant is the tax savings that RRSPs offer.
For every dollar you contribute to your RRSP (up to your personal RRSP deduction limit), you’re effectively able to shave a dollar off your income for the year. If you’re a salaried employee with taxes automatically deducted, the net result will be a refund after you file your income taxes.
So, for example, if you’re just starting out in your career, with a relatively low salary and a big mortgage payment or rent eating up a good chunk of your disposable income, contributing to an RRSP can actually help you.
Another reason younger people jump on the RRSP bandwagon is that the program is generally a long-term proposition. If you’re young, you have the luxury of riding the ups and downs that come with any risk investment over the coming decades.
Registered Education Savings Plans (RESP)
Once you have children, you may become interested in Registered Education Savings Plans (RESPs). While these aren’t really for retirement planning, they do operate similarly to RRSPs.
If you aspire to send your child to a post-secondary institution, RESPs are a great way to do so without having to deplete your savings or go into debt. While there’s no immediate tax savings for investing in RESPs, any interest the investment earns is accrued tax-free. Each child with an RESP account is also eligible for the Canada Education Savings Grant, regardless of household income.
The basic CESG is calculated at 20 per cent of the annual contributions made to all eligible RESP accounts for your child, up to $500 per year.
Lower- and middle-class families may also qualify for additional CESG based on annual household income and how much they’ve made in annual contributions.
Currently, the total maximum amount of CESG a child can get is $7,200.
Guaranteed Investment Certificate (GIC)
Another secure option is Guaranteed Investment Certificates (GICs). GICs are essentially a private bank’s equivalent of government bonds. GICs are a little more flexible though, with terms ranging from one month up to 10 years.
Usually, the shorter the term the lower the interest rate, but even the best GICs on the market max out at less than three per cent. Not the kind of return you can depend on if you want to retire wealthy, but it sure beats losing money.
Tax-Free Savings Account (TFSA)
Despite its name, a TFSA is not actually a savings account. It’s more of a savings vehicle where you can hold different assets or accounts like your cash, mutual funds, GICs, stocks and bonds.
TFSAs are best suited for long-term investments, like your retirement, but it’s certainly a good place to put your money for short-term investments too since it is so accessible. Neither your contributions nor interest earned nor withdrawals are subject to taxes in a TFSA. You are free to withdraw your money anytime without penalty.
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This post has been updated.