I started my RRSP (Registered Retirement Savings Plan) at the age of 18 with a contribution of $25 per month – $300 a year! My parents were insistent that my budget, even while I was a student, include this long-term savings component so that my savings would benefit from compound interest. You may remember we talked about compound interest in prior episodes and it means the addition of interest to the principal of a deposit ? interest on interest. This compounding impact, reinvesting interest, works well when you have a long-time horizon for your investments. Better to save small amounts and reap the benefits of compound interest versus delaying the start of savings because you do not have a lot to invest.
If you’re thinking of saving up for a car, home, education or trying to figure out your retirement savings to stay or become financially fit in the future, you may have come across two plans the Canadian government has in place: TFSA (Tax-Free Savings Account) and RRSP. It is essential to know the difference between the two to determine how you can save for the long-term and benefit from these plans.
Today, I’m going to give you an overview of the TFSA and RRSP. I compare and contrast the two regarding the appropriate age range of contributors, the pros and cons of each plan, and what happens when you withdraw your money. I also share how each plan impacts your taxes and how you can save your money wisely to have a financially fit future.
“When saving for retirement it is generally good to use a combination of the TFSA and RRSP plans.” – Tracey Bissett
This Week on Young Money:
- Explanation of the TFSA and RRSP plans
- Benefits of each and questions to ask yourself when deciding where to put your money
- How the government computes your contribution room for TFSAs and RRSPs
- Tax implications for each program
- Important dates to remember when making contributions
- When to consult a specialist (ie: financial or tax planner) to discuss your personal situation
- Where to find the specific details of each plan ? double check before making contributions
Reminders from David Chilton of The Wealthy Barber:
- If you get a refund from your RRSP, don’t spend it. Pay down debt. Reinvest. Do something with it.
- If you go the TFSA route, don’t spend it for anything other than what you’re saving it up for. Do not use your TFSA like a debit card.
- Whichever route you choose, save more.
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