How to navigate the registered savings options
To encourage Canadians to save their money, the Canadian government has created several tax sheltered savings plans, these plans include, registered retirement savings plans (RRSP), registered education savings plans (RESP), registered disability savings plans (RDSP) and tax free savings accounts (TFSA).
In a perfect world you would like to maximize your contributions to all registered plans, however for most of us this is not realistic. So how do you choose where to save your money?
I am a fan of “free money”, so my advice would be to contribute first to the savings plans that offer government grants and to maximize those grants.
For parents with a disabled child, the federal government will provide matching grants of 100, 200 or 300 percent of contributions to a RDSP, depending on the family’s net income and amount contributed.
RESPs help parents save for the children’s post secondary education by providing government grants, matching funds and tax deferred savings.
Next is the choice for retirement savings, RRSP or TFSA? Unfortunately there is no easy answer; it depends on each individual’s situation.
The technically correct answer is it comes down to comparing your marginal tax rate today versus your estimated marginal tax rate in the future.
The ideal scenario for an RRSP is that you contribute to your RRSP when you are in one of the top tax brackets and receive a large tax refund at the time of contribution.
Money grows tax deferred inside the RRSP and when you take withdrawals in the future you are in a lower tax bracket. But if you are not in the top tax bracket, TFSAs may be a better option. For 2013, most people will have total TFSA contribution room of $25,500.
When choosing between RRSPs or TFSAs my over generalized recommendations would be, if you are in the lowest tax bracket (for 2013 income below $43,561), maximize your TFSA contribution first because at this level of income your marginal tax rate is approximately 20%.
Chances are when you make withdrawals from your RRSPs you may be in a higher tax bracket and the RRSPs may affect your ability to claim income tested government benefits (Trillium benefit, HST credit, GIS, etc.) or could cause OAS claw back.
If you are in the upper tier tax brackets (for 2013 income above $87,124 and $135,055), maximize your RRSP savings first because at this level of income your marginal tax rate is 43% to 46%.
If your income is in the middle tax brackets, the choice is more an individual choice and neither is a bad choice.
Choosing to invest in a TFSA or an RRSP is almost always preferable to investing in a non-registered savings account. The only possible exemption is where you earn active business income through a corporation which is taxed at the small business rates.
A non-registered corporate investment account may be the preferred option in such cases.
Carol Brubacher is a chartered accountant with Collins Barrow Chartered Accountants in Elora.
