Investments and Taxes

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Unlike an TFSA (as we discussed last week), an RRSP is a long term savings plan for retirement. RRSP’s are designed to allow you to contribute an amount up to your maximum contribution limit and earn higher interest on the amounts. Because these types of savings plans are registered (registered just means that they are registered with CRA), you are allowed to claim the amounts you contribute on your taxes which allows you to get a tax deduction (for the average Canadian who pays an estimated 30% tax rate, you will save $300 for every $1000 you contribute to an RRSP as long as it is within your contribution limit).

The reverse can also occur. If you withdraw funds from your RRSP, you are subject to pay income tax. You need to also keep in mind that when you withdraw funds, the financial institute that holds your RRSPs are going to deduct income tax off of your withdraw. RRSP’s are designed to give you a tax break when your income may be the highest in your working life span and give you income when you are retired when your income is the lowest so your tax rate will be lower. You are deferring paying tax when your rate is higher for a time when your rate is lower. For most Canadians, this is retirement age.

So when it comes to which type of plan is right for you? It’s hard to answer that with 100% certainty. A mixture of a TFSA and some kind of registered savings plan (like RRSP) is the best. With a TFSA, you can invest in other things like stocks, bonds, mutual funds, etc and any interest or proceeds that get re-deposited into the TFSA would be tax free. RRSPs can also be levied and invested. You will receive tax breaks with RRSP contributions, but not with TFSA’s.

To see which is the best option for you, we recommend sitting down with a financial planner who can walk you through the ins and outs of investments. If you are in Calgary, we can recommend a great financial planner who can help you out. Give us a shout if you have questions around taxes and your investments! We would be happy to sit down with you and look at some tax planning options.

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