Introduction to:Tax Free Savings Accounts and Registered Retirement Savings Accounts

What are Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP)?

Short Answer ? They are both tax effective vehicles for Canadians to save

Longer Answer? Let me try to explain….

TFSA’s were created by the federal government in 2009 and are available to all Canadians 18 yrs. or older

RRSP’s were created in the middle of the baby boomer years (1957)

Both TFSA’s and RRSP’s allow savings to grow in an account “Tax Free”

Example of “Tax Free” Savings Growth

Based on investing $1,000 per year for 20 years with 5% compound interest (assumes middle income tax rates)

Comparison: TFSA vs. RRSP

TFSAMaximum $5,000 year-no income needed Can “carry forward” unused contributionsContributions are not tax deductibleWithdrawals are not taxed, and create an equal amount of contribution room (next year)Can contribute at any age

RRSPUp to 18% of earned income to max of $22,000Can “carry forward” unused contributionsContributions are tax deductibleWithdrawals are taxable at your effective tax rate at the time of withdrawal

Cannot contribute after 71

Understanding the Tax Implications of TFSA vs. RRSP

TFSA

RRSP

TFSA investments are made after you pay tax on the money

RRSP investments are made with money that you don’t pay tax on, since the investment is tax deductible

So which account is better?

Short Answer ? It depends, but both are good…

Longer Answer? It depends….

There a several factors, however your tax rates at the time of deposit and time of withdrawal are the most important-this information may not be known…

If the money is to be used for a purchase like a house or car, the TFSA is best since the contribution room does not go away if you make a withdrawal

With the disappearance of “Defined benefit” pension plans-both TFSA’s and RRSP’s are needed to save for retirement

The End

Thank you

BackupSlides

Investments that can be held in TFSA or RRSP accounts

Both accounts can hold:

Cash (very low interest rate)Guaranteed Investment Certificates ( low return 1.25-2.6%-but safe)Bonds (less secure than GIC 2.5-4.5%)Mutual Funds (higher risk depends on fund type can be 5-10%)Exchange Traded Funds (similar to mutual funds but lower cost to own)Individual Stocks (Generally the highest risk, but highest return potential)

What you hold depends on the when you need the $$ and your appetite for riskMy personal preference is Exchange Traded Funds

Tax Rate Comparison

Marginal tax rate(contribution/retirement) 40%/40% 40%/30% 30%/40%

Contribution (before tax) $1,000 $1,000 $1,000 $1,000 $1,000 $1,000

Tax payable $0 $400 $0 $400 $0 $300

Net contribution $1,000 $600 $1,000 $600 $1,000 $700

Investment income $2,207 $1,324 $2,207 $1,324 $2,207 $1,545

Market value* $3,207 $1,924 $3,207 $1,924 $3,207 $2,245

Tax payable $1,283 $0 $962 $0 $1,283 $0

Account value (after-tax) $1,924 $1,924 $2,245 $1,924 $1,924 $2,245

*Assumes annual 6% return over 20 years.

Retirement Tax Equal Tax Lower Tax HigherRRSP TFSA RRSP TFSA RRSP TFSA