Young Investor’s Guide to Building a Financial Future- Tax-Advantaged Retirement Accounts

Part 3

The government wants you to save for the future. To encourage you to do so, retirement savings plans, such as regular or locked in Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA) offer big tax advantages that can save you money today and compound the growth of your savings for tomorrow.

Retirement focused plans like RRSP’s can be opened on your own and allow you to contribute to your retirement and receive a tax rebate at tax time, essentially letting you contribute pre-tax income. Better still, your employer may offer matching funds in a locked-in RRSP. Contribute as much as needed to maximize these matches and avoid leaving extra money on the table.

Come tax time, your and your employer’s contributions are not reported as taxable income. Investments held inside the account grow tax deferred. You won’t have to pay any taxes until you start taking withdrawals from that account. The result? More money is available to work for you—and to benefit from the powers of compounding. Eventual withdrawals are taxed as income at the time of withdrawal.

Related to an RRSP is the new First Home Savings Account (FHSA).  If you don’t currently own a home, you can contribute up to $8000 a year, to a maximum of $40,000.  Contributions are treated like an RRSP contribution and result in a reduction of taxes owing. If you choose to use the funds to purchase a home, you can withdraw the funds, and any growth, tax free.  If you don’t end up purchasing a home, those funds can be rolled into an RRSP without affecting your existing RRSP contribution room.

There’s one more account to get to know: Tax Free Savings Accounts. Unlike RRSP’s and the FHSA, contributions to a TFSA are with after tax money. That means you can’t deduct those contributions on your tax return. But it also means you won’t owe taxes when you start taking withdrawals in retirement. In the meantime, just as with a traditional RRSP, your investments grow tax-free along the way. This can be a great trade-off if you’re a younger investor who hasn’t hit your peak earning years and you are still paying a relatively low-income tax rate.

Taking advantage of some of the tax deferred or tax free growth accounts the government and some employers offer can be a simple way to start your investment journey. As everyone's financial story is different please remember that all tax strategies should be discussed with a qualified tax professional to make sure the solutions you choose are right for your unique situation.

In short: 

If possible, max out your retirement plans to take full advantage of their powerful, tax-sheltered compound growth over time. Also, avoid leaving money on the table if your employer is offering to match your RRSP contributions.

Interested in learning more about how to take the first steps toward meeting your personal financial goals? Reach out to set up a time, and let’s talk.