Angela Iermieri* | Financial Planner | Desjardins Group
Updated on January 10 2019
Some myths are harder to squash than others. This is especially true about retirement. Today, we're going to look at some myths that keep coming up when we talk about Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
1. RRSPs are for people close to retirement
No, in fact, it's quite the opposite! The earlier you start the less you'll need to contribute overall. This is thanks to the compounded return, which means you get a return on your return.
2. An RRSP can only be used for retirement
Don't forget about buying a house and financing your studies! An RRSP can be used to purchase your first property through the Home Buyer's Plan (HBP) or finance your education with the Lifelong Learning Plan (LLP).
3. An RRSP is an investment
Not exactly. An RRSP is like a piggy bank you contribute to which rewards you with tax deductions. And you can grow your savings that you've already contributed by choosing different types of investments, like guaranteed investment certificates, mutual funds or securities, based on your goals and risk tolerance.
4. If you have an RRSP, you'll lose your old-age pension once you're retired
Yes, but hang on . . . you must earn a minimum of $125,696 annually to lose your entire old-age pension. You begin to lose a portion of your Old Age Security (OAS) if your net personal income is higher than $77,580. But don't forget that disbursement and income-splitting strategies can be used to avoid OAS clawback.
5. The TFSA is just a savings account I can dip into freely
Yes, you can make withdrawals, but you can't put back that money until the following year. The advantage of the TFSA is that it lets you grow your savings and the income generated (interest, dividends, capital gains) without being taxed. Your best bet is to leave your money in the account long enough for it to generate income.
6. Having an RRSP is pointless if I have to pay tax on it once I'm retired
Contributing to an RRSP lets you put off paying taxes on the amount saved before retirement. Generally speaking, income levels are lower at retirement, but so is the rate at which you are taxed. What you need to remember is that your money is growing tax free during all those years of contributing to your RRSP.
7. The TFSA is better than the RRSP: you don't have to pay taxes on withdrawals
You won't have to pay taxes when you make a withdrawal from a TFSA because you did not benefit from a tax deduction when you contributed, unlike the RRSP. To determine which of these options best suits your needs, speak with your advisor.
8. The TFSA is not available to the unemployed
All Canadians who are aged 18 or over can contribute to a TFSA, whether they earn income from work, have retirement income, or even if they don't generate any income at all. The contribution limit this year is $6,000 and the cumulative limit since 2009 is $63,500.
Have you heard of anything else that has got you wondering about RRSPs and TFSAs? Write to me and we'll explore your questions in another post.
* Financial Planner and Mutual Funds Representative for Desjardins Financial Services Firm Inc.