RRSPs, RESPs, TFSAs: what they are and how to get started

FERGUS  – With a new year comes a new opportunity to manage finances. 

Whether saving for retirement, university or other big life moments, choosing the right  account is vital to financial success. 

RRSP

A registered retirement savings plan (RRSP) is an asset for those looking to save for retirement early on.

“An RRSP is about deferring taxable income from when you’re in a high income bracket into retirement,” said financial advisor Dan Allen from Dan Allen Financial in Fergus.

“The benefit is you get tax deductible savings now and you pay income tax on that retirement income in a lower tax bracket down the road.”

To open an RRSP one must be a Canadian resident with a valid social insurance number. The owner of the account can not be younger than 18 years of age and the account must be closed by Dec. 31 of the year the account owner turns 71.

An RRSP can be opened by making an appointment with your home bank or by visiting a financial advisor. 

“The easiest way to save for it [retirement] is to open an RRSP and really just start a monthly savings plan,” said Allen. 

“We recommend saving a certain amount of money after every pay cheque.” 

There is a maximum savings limit of 18% of the account owner’s yearly income.

“If you don’t have a pension, that 18% gets adjusted for any pension you might be paying into,” said Allen.

RESP

For parents looking to fund post secondary education, a registered education savings plan (RESP) can be a valuable asset.

“The benefit is that the federal government will match 20% of contributions up to $2,500 a year,” said Allen.

Anyone 18 years or older can open a RESP for any child, or other adult, to save for post-secondary education, including parents, guardians, relatives or friends. 

Allen recommends that parents open an RESP as soon as possible, as the longer the account is open, the more funds will be available to the child. 

In the event the person receiving he funds does not attend post secondary education, the owner of the account is permitted to withdraw the amount regardless. 

“You don’t have to worry about whether your child decides to go to school or anything like that,” said Allen.

The last year you can add money to the account is when the child is 17 years old. 

An RESP can be opened by making an appointment with your bank or by visiting a financial advisor.

TFSA

Allen says those looking to save money in a short amount of time should consider a tax-free savings account (TFSA).

“It’s an opportunity to save money and never pay income tax on the dividends or interest or capital gains that might happen from the investment inside a TFSA,” said Allen.

“Right now the contribution limit is $7,000 a year, but it accumulates each year.”

Someone who was 18 years old in 2009 when the program started would have a contribution limit of $109,000 per year, granted they have had an account since 2009. 

“It’s a great savings plan for people that are saving either for retirement or for purchasing their first home or a car,” said Allen. 

Allen recommends a TFSA to those looking to save with a yearly income under $60,000.