Blog — Wealth Wednesdays
It's A New Year! Welcome to Retirement Savings Season
8 min read By Susan Lam
With the passing of another year, January comes as a fresh start for many, and after the year we all experienced, we are so ready for it. In the financial world, a new year means one thing - Retirement Season! What is Retirement Season you ask?
Briefly, it’s the time from January 1st to March 1st of each year to make any remaining contributions to your Registered Retirement Savings Plan (RRSP) before the tax season. A new year is also a great time to start thinking about your savings, like making new Tax-Free Savings Account (TFSA) contributions or a great time to start your Emergency Savings Fund.
Usually during this time, you’ll see an influx of ads and promotions from banks and credit unions to “contribute to your savings”, “open a new RRSP/ make your TFSA contribution and get this…”, and so on — And they are not wrong! This is the perfect time to start fresh with your finances, think about your year ahead, plan for the tax season and start a savings plan right for you.
In true Wealth Wednesday fashion, let’s talk about the ways you can start saving and the products designed by the government that help reach your financial wellness. Ready? I think you are!
Everyone should have (or start) Retirement Savings!
What is an RRSP?
An RRSP (Registered Retirement Savings Plan) is a tax-deferred savings plan that is meant for, you guessed it, your retirement. You are saving for your future self when you are retired, no longer working, and enjoying life as a senior citizen! Contributions in this plan are tax-deferred – meaning whatever amount you put into this plan, you pay taxes later in life when your tax bracket is much lower (i.e. when you are older and not earning an income). In addition, contributions made into this plan are deducted in your yearly income tax – meaning whatever amount you put into this plan, you can claim in your taxes to reduce your income tax, which also can result in a larger tax return!
Three main purposes for a RRSP:
Retirement - the obvious one
First-time Home Buyer Plan - you can withdraw up to $35,000 when you are planning to buy your first home!
Life-long Learning Plan - if you ever decide to go back to school and need some funds!
How much can I contribute to my RRSP?
The contribution limits also vary between person to person, but a rule of thumb is your RRSP limit is 18% of your pre-taxed earned income. The easiest and most accurate way to find out your exact RRSP contribution room is via your CRA online account.
Another way to quickly reference your yearly RRSP contribution room is on your Notice of Assessment after
you file your yearly taxes, which can also be found in your
Think of your RRSP as your long-term savings. You are saving for your future self to live a comfortable and easier life after your long years of working hard. An RRSP will be one of your main sources of income when you are retired!
*Stay tuned for our dedicated post on RRSPs in the upcoming weeks to learn more about the benefits, limits,rules, and why it is important to open an RRSP
Grow Medium To Long-Term Savings Tax-Free
in a TFSA
What is a TFSA?
A TFSA (Tax-Free Savings Account/Plan) is a tax-sheltered savings account that is meant for medium to long term savings - which I usually peg at 5+ years or longer depending on the individual. Each year, Canadians have a set amount that can be saved within this account/plan where any interest, growth or investment gains cannot be taxed by the government. We all love that right!
Here’s a little back story about the TFSA. In 2009, the Canadian government introduced this new savings plan for Canadians to save tax free, where each year you have a limit to how much you can contribute into this plan. This plan was meant to promote long term savings amongst Canadians because it provided a method for Canadians to grow and invest their savings without taxation, while still being accessible when needed. The TFSA has now become one of the most popular banking products for all to invest, save and grow your money. Funds that you place in this account have already been taxed (i.e. money from your paycheques), so you can save without worrying about being taxed again in the future.
If you have never contributed into a TFSA, turned 18 BEFORE 2009 and are a Canadian resident, you have a total contribution room of $75,500 for 2021.
Click here to access the TFSA Contribution Limits per year since 2009.
How do I calculate my TFSA Contribution Room?
1. Take the year you turned 18, then add up all the TFSA
limits of the years following until the current year, in this
case - 2021!
Example: If you turned 18 in 2016, add up the past 6 years TFSA limit and your total room is $34,500. This is how much you can put in a TFSA without going over your contribution limit and to avoid penalties.
2. Log into your CRA account and check your total contribution room. This figure is updated annually and
is your most accurate resource.
*Stay tuned for our dedicated post on TFSAs in the upcoming weeks to learn more about the benefits, limits,rules and why it is important to have a TFSA
RESP For Parents, Caregivers, and Guardians Who Want
to Save for Kids
What is an RESP?
An RESP (Registered Education Savings Plan) is a type of plan created by the government to save for a child’s future post-secondary education. RESPs are typically opened by family members, but friends and relatives can also open an account for children. The great thing about RESPs are that the savings within the plan grow tax-free for the parents or contributors, so you do not have to worry about the savings being taxed until it is being used by the child to attend post-secondary education.
Once your child needs the RESP for tuition and costs, the funds are withdrawn as an Educational Assistance Payment (EAP), which is taxed under the student. Since many students have little to no income, they can usually withdraw the money with little to no tax. The student will then receive a T4 slip for their EAP because they will be filing under their taxes.
How much can I contribute to an RESP?
According to the CRA website, there are no annual contribution limits for any RESPs opened after 2007*. However, the lifetime contribution limit of an RESP is $50,000.
RESP contributions can be made for up to 31 years, or until the child begins post-secondary education, where they will then start to withdraw from it for the purpose of paying for university or college.
*Refer to the CRA website for RESPs opened before 2007.
What benefits do I receive from an RESP?
RESPs can also receive the Canada Education Savings Grant (CESG) on the first $2,500 and the lifetime maximum any plan can receive is $7,200. In addition, low-income families can also apply for the Canada Learning Bond (CLB), where the Government of Canada contributes up to $2,000 to an RESP for eligible applicants. You can apply for both of these grants via the financial institution you open the RESP with.
RESPs can be opened at any financial institution that offers the product and can be invested in various strategies to ensure the funds grow. Since this is a long-term investment, it’s best to make regular contributions to the child’s education and also invest accordingly.
To wrap things up...
Now is a great time to re-evaluate your finances from last year, make little (or big!) changes and get your savings started!
The government provides great resources and plans that support your financial wellness. There is always a strategy that is right for you and the financially savvy you that you aspire to be. You might have received a bonus from last years’ hard work, or some extra cash from Christmas gifts. Or finally ready to set up automatic transfers into your savings every time you get paid. Starting somewhere is better than starting nowhere and this year is your year to start.
In the upcoming weeks, I will be covering each savings strategy in depth to explain the rules, limits and benefits and what is right for you. Stay tuned and looking forward to helping you achieve greatness!
Further reading and sources: