TFSAs, RRSPs, and other Registered Accounts | Financial Future in Canada Roadmap
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We’re so glad to see you for Lesson 4 of the Financial Future in Canada Roadmap!
Today we’re going to delve into the world of registered products. These tax-advantaged savings accounts offer tax benefits to encourage people living and working in Canada to save money and invest.
Two of the most common registered products are RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts). We’ll cover the basics of each and explain how newcomers to Canada can benefit.
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Introducing Canadian tax-advantaged accounts
Although the purposes of an RRSP and a TFSA are different, they share some similarities. The main similarity is that the money you contribute to either account is not taxed while it’s in the account. The details of this differ for each account, but the general idea is that once the money is in the account, any growth (such as interest earned, dividends, or capital gains) is not subject to tax.
Both accounts also limit the amount of money that can be contributed each year.
A note: You may be wondering if you can even open an RRSP or TFSA once you arrive in Canada. Both accounts are available to new residents of Canada. You do not need to be a citizen to take advantage.
For a TFSA, you must be at least 18 and have a valid SIN number.
For an RRSP, you must have employment income and have filed a Canadian tax return.
Let’s dive into the specifics of each account.
What is an RRSP?
An RRSP is an account designed to help people to save for retirement. Within the RRSP, you can invest your money in mutual funds, stocks, bonds, and even foreign currency.
The money you contribute to your RRSP is protected from being taxed once in the account. This means that any funds inside the RRSP can grow completely tax-free until they are removed.
Once you turn 71, the money must either be liquidated (where it is taxed at a lower marginal tax rate) or converted into an RRIF (Registered Retirement Income Fund) or annuity, both of which can offer steady income during retirement.
If you withdraw from or cash out your RRSP earlier than 71 years of age, you must pay the deferred income tax on your money. There are only two exceptions where you can withdraw tax-exempt funds:
Paying for your first home (up to $35,000 for first-time home buyers who are buying or building a primary residence for themselves or a related person with a disability)
Funding full-time education or training for you or your spouse ($10,000 per calendar year, up to a maximum of $20,000 total over four calendar years)
However, in both these situations, the funds must be paid back over 10 to 15 years, so it’s essentially an interest-free loan you’re borrowing from yourself.
Setting up an RRSP
You can enroll in an RRSP through your work (called a Group RRSP) or set up an individual or spousal RRSP independently.
If you’re setting up an RRSP at work, you’ll need to talk to your HR department or payroll manager who can help you get your account set up.
If you’re opening an RRSP independently, there are lots of Canadian financial institutions that can help. You can set your RRSP up at a bank, credit union, or insurance company.
In either situation, you’ll need to fill out an application. Once your account is approved and open, you can start contributing.
Persons with Canadian employment income who pay taxes can open an RRSP as long as they are younger than 71 years old. This includes minors.
What is a TFSA?
A TFSA is a slightly more flexible savings account designed to help Canadians save money for any purpose, not just retirement. Like the RRSP, money inside a TFSA account can be used for investing or sit in cash. It’s entirely up to you.
With a TFSA, money is contributed by individuals after their income tax is paid. This means that whenever money is withdrawn, it will not be taxed. Once you contribute cash to your TFSA, you will not pay any money on income growth within the account. This includes interest, capital gains, or dividends.
While putting all your savings in a TFSA may be tempting, there are limits on how much you can contribute every year. This is referred to as contribution room. People in Canada, regardless of age or income, can put up to $6,500 per year into their TFSA as of 2023. However, any unused contribution room rolls over into the following year. Here’s an example:
You open your TFSA in 2019 and contribute the annual maximum of $6,000 that year and the following year. However, in 2021, you contribute only $2,000 to your TFSA. In 2022, you were allowed to put in $10,000 – $6,000 for that year, plus an additional $4,000 that rolled over from 2021.
Contribution limits can change based on inflation, so pay attention to information and notices from the Canada Revenue Agency notifying you of the limit for the upcoming year.
It’s crucial to avoid over-contributing to your TFSA. If you do, you’ll be charged a fee of 1% per month on the excess funds until they are withdrawn.
Setting up a TFSA
Unlike an RRSP, you must be over 18 to open a TFSA.
To get started, you’ll be asked for your SIN number, date of birth, and valid identification. Once your account is set up, you can fund it to the maximum allowable contribution.
Banking that’s built for your needs:
The Financial Future in Canada Roadmap is sponsored by Scotiabank.
While RRSPs and TFSAs are a natural next step in your financial growth, most Canadians and newcomers set up their everyday banking first. A great place for both your daily banking needs as well as your RRSP or TFSA is Scotiabank.
Don’t know where to start? The Scotiabank StartRight® Program has been designed to provide personalized solutions and assistance to new Canadians.
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