04 February, 2021 Financial Planning



You know it’s important to build wealth during your working years, but what are the best ways to save for retirement? Let’s consider two investment vehicles that are ideal for helping you create income when you retire.


Registered Retirement Savings Plan (RRSP)

Company and government pension plans can be steady sources of retirement income, but they likely won’t generate enough cash flow to cover all your expenses in retirement. That’s where an investment vehicle like the RRSP comes into play.


When you open an RRSP, you can make contributions to your plan based on how much income you’ve earned (e.g., from employment or self-employment) in a given calendar year. The maximum annual contribution is 18% of your earned income for the year, up to a pre-determined limit set by the federal government. For instance, the maximum contribution for the 2021 tax year is $27,830.*


If your employer contributes to a registered pension plan (RPP) or deferred profit-sharing plan (DPSP) on your behalf, it reduces how much you may contribute to an RRSP. Your income tax return statement will disclose your total RRSP contribution limit for the following tax year, while the annual T4 tax slip from your employer will state your RPP and DPSP amounts, so you can calculate how much you’re allowed to contribute to an RRSP.


Key benefits of RRSPs:

  • Contributions are tax-deductible and will reduce the amount of income tax you must pay
  • Any growth of wealth in your RRSP is tax-deferred, which means capital gains, dividends, interest, etc. won’t be immediately taxed when earned
  • You can borrow from your RRSP to help purchase your first home or cover education expenses, although this withdrawal is subject to taxation if you don’t repay the amount to your RRSP according to the federal government’s schedule


Tax-Free Savings Account (TFSA)

A TFSA is another useful retirement income vehicle. Each year, from the age of 18, you may contribute to a TFSA. Unlike an RRSP, the maximum you may contribute to a TFSA is based on the limit prescribed by the federal government and is not based on earned income. Currently, the annual TFSA contribution limit is $6,000,* but it increases from time to time, in response to inflation.


Key benefits of TFSAs:

  • You don’t need an income to open a TFSA and make contributions, and there is no age at which you must begin making withdrawals
  • While RRSP contributions are made from pre-tax dollars (i.e., before you pay tax on that money), TFSA contributions come from after-tax dollars. As a result, all income earned in a TFSA is tax-free
  • TFSAs are flexible because you may withdraw at any time without paying tax, and your contribution room won’t be reduced. You can recontribute the amount you had withdrawn – as long as it’s not in the same calendar year -- and still be eligible to contribute the maximum amount for future years

Better together

Some people wonder if they should contribute to an RRSP or TFSA. However, it doesn’t have to one or the other! RRSPs provide immediate tax relief and your assets grow tax-deferred, while TFSAs can be used as an “emergency fund” and any income earned won’t affect income-tested government benefits like Old Age Security or Guaranteed Income Supplement. For each plan, you can invest in a wide range of securities, from mutual funds and stocks to bonds, GICs, and other income-producing products.


Although they have different features and benefits, both plans can help you generate retirement income. If you have the money available, consider investing in both plans for long-term wealth creation.


Contact our office to discuss the merits of these two plan types and review your retirement goals.


* Source: Canada Revenue Agency