Shane Dubin on the Importance of Understanding and Taking Advantage of TFSAs, RRSPs and Other Canadian Financial Benefits
Today, many Canadians have become aware of the importance of savings plans. Families with young children are sometimes overlooked, but this demographic needs to take the time to look into their savings and maximize their money to better care for their children in the future.
The Canadian government offers several useful savings plans to help families build wealth and ensure financial stability well into old age. Shane Dubin, of Canaccord Genuity Wealth Management explains how Canada’s special programs work and how the average investor can leverage their money to create the foundations for future security. Shane provides special recommendations for families like his own, parents in their forties, and young children at home.
Tax-Free Savings Account (TFSA)
The TFSA program was started by the Canadian government in 2009. It allows people 18 years of age or older to set aside tax-free money throughout their lifetime. Any contributions that an investor makes are not deductible under income tax rules. Contributions and withdrawals, as well as income earned, are tax-free in most situations.
The three types of TFSAs are deposits, annuity contracts, and arrangements in trust. TFSAs can be issued by banks, credit unions, insurance companies, and trust companies.
As of 2021, each Canadian's amount of money can contribute to a TFSA is $6,000 per year totaling $ 75,500 since inception.
Registered Retirement Savings Plan (RRSP)
RRSP plans involve placing after-tax money into a savings plan. The money grows tax-free until it is withdrawn. It is then taxed at the marginal rate. RRSPs have much in common with the American 401(k), but they have significant differences.
One of the significant advantages of the RRSP is that contributors can deduct contributions to these plans against their income. The growth of an RRSP investment is also tax-deferred. Returns are exempt from capital gains, income tax, and dividend tax.
The effect of an RRSP is that contributors can delay tax payments until they retire. At this time, their marginal tax maybe lower than when they were working full-time. The Canadian government offers this program to encourage retirement savings. This means that the population will have less reliance on the Canadian Pension Plan.
There are four main types of RRSP available. A single person sets up the Individual RRSP. The Spousal RRSP is set up to provide benefits for a single spouse and tax benefits for both. The high earner can contribute to an RRSP in their spouse’s name.
The Group RRSP is set up by an employer and is funded by payroll deductions. This system is similar to the American 401(k). The Pooled RRSP is for small businesses and the self-employed.
Many different types of investment are allowed in an RRSP. These include mutual funds, exchange-traded funds, bonds, foreign currency, mortgage loans, income trusts, and guaranteed investment certificates, among many others.
Registered Retirement Income Funds (RRIF)
When an RRSP holder turns 71, their RRSP must either be liquidated or converted to a Registered Retirement Income Fund or annuity. RRIFs are similar to annuity contracts, paying out income to beneficiaries.
Registered Education Savings Plan (RESP)
An RESP is comprised of a contract between a subscriber and a promoter. The subscriber names beneficiaries (the students) and agrees to make contributions in their name. The promoter agrees to make educational assistance payments to each beneficiary.
Most RESPs are used to benefit children, but RESPs can also be opened for adults. When a child covered by an RESP enrolls in post-secondary education, they can begin receiving EAP payments. These payments come from the government grant money and investment earnings in the plan.
With an RESP, savings are tax-free. As long as the money stays in the plan, there is no tax on earnings. You can contribute 2500/year and receive 20% in government grants.
If the plan is made for a child age 17 and under, the Canadian government and some provincial governments put money in the RESP in the form of grants or bonds.
Contributions to the plan are not tax-deductible. When EAPs are paid to the beneficiary, this money is included in their taxable income.
The lifetime maximum of a RESP plan is $50,000.
Saving for a Family: Which Plan is Best?
Shane Dubin has a special interest in determining which savings plan is the best for a family with young children. Dubin recommends that families with young children primarily use the RESP plan for saving for their children’s education, paying down their debts (mortgage, LOC etc.), then trying to maximize their TFSA’s and lastly contribute to their RRSP’s.
Understanding Canada’s Savings Plans
No matter your age or financial situation, a Canadian savings plan is right for you. Examining the particulars of each plan, along with the tax circumstances that accompany the contributions and withdrawals, can help you decide whether each form of investment is right for you. Consulting with a savings expert like Shane Dubin of Dubin Wealth Management may be your best choice when it comes to making these important financial decisions.
Shane Dubin is a Senior Vice President, Investment Advisor and Portfolio Manager at Canaccord Genuity Wealth Management. His views, including any recommendations, expressed in this article are his own only, and are not necessarily those of Canaccord Genuity Corp.
This article does not necessarily reflect the opinions of the edtiors or the management of EconoTimes