Navigating the Alphabet Soup of Registered Savings Plan Options

We can all agree that saving money for the future is a great idea, regardless of how you do it. Where things get murky, is when trying to decide which saving vehicle is the best option for your specific needs.

With this in mind, we wanted to take a close look at registered savings plan options, including TFSAs, RRSPs, and RRIFs. Each one has its benefits, but which one is best for you depends greatly on what you need the money for, as well as your age, income, and many other parameters.

Tax-Free Savings Account (TFSA)

A TFSA is a registered, tax-advantaged savings vehicle where you can earn tax-free money in the form of interest, capital gains, or dividends. The money you contribute to a TFSA is taxed, but the money you make is tax-free. More flexible than an RRSP, TFSA funds can be used for virtually any big purchase, including a down payment on your first home, an extended vacation, wedding costs, or education, in addition to retirement. Additionally, anyone can contribute to a TFSA, as earned income is not a requirement like it is for an RRSP. On the flip side, TFSA contributions are not tax-deductible, whereas RRSP ones are.

• Age Requirements: All Canadians 18 years or older can open a TFSA as long as they have a valid Social Insurance Number.
• Contribution Limitations: The amount you can contribute is determined by your “contribution room,” which accrues every year once you are 18 years old.

It is comprised of your current year’s limit, how much you have withdrawn and/or added back in the previous year, and any unused room from previous years.

There are also limits on the total you can contribute each year (2022 is $6000), but you can exceed this amount by adding in any unused contribution room from previous years.

Be careful though, if you put in too much in any given year, you can be penalized with a 1% per month tax based on the excess.

• Investment Options: TFSA funds can be held as cash, stocks, bonds, mutual funds, Guaranteed Investment Certificates (GICs), and a variety of other methods.
•  Benefits and Flexibility: Outside of the obvious benefit of tax-free investment income, a TFSA allows you to save for many long- or short-term goals. It is also a good way to increase the amount you save for retirement since you can make contributions to a TFSA even over the age of 71. TFSA funds can be withdrawn tax-free, in any amount, at any time.

Registered Retirement Savings Plan (RRSP)

An RRSP is a way to save money primarily for retirement purposes. Contributions and interest earned on the account are tax-deferred, as long as the money stays in the account. Contributions are tax-deductible, potentially reducing your taxable income, but taxed upon withdrawal when, in theory, your income is lower and thus taxed at a lesser rate.

• Age Requirements: Officially, there is no minimum age to open an RRSP, though some financial institutions require customers to be at least 18. You can continue to contribute annually until the end of the year you turn 71 as long as you continue to earn income and file a tax return.
• Contribution Limitations: Your annual maximum contribution is the lesser of 18% of your earned income for the previous year or $29,210 in 2022, plus unused contribution room from previous years. This amount changes annually based on inflation. The deadline to make 2022 contributions is March 1, 2023.
• Investment Options: Similar to a TFSA, you have a great deal of flexibility when it comes to ways to invest in an RRSP, including cash, GICs, mutual funds, government or corporate savings bonds, and even stock exchange securities and ETFs. You can move money between different vehicles too, to increase your RRSPs growth.
• Benefits and Flexibility: As discussed earlier, contributions are both tax-deferred and tax-deductible. Spousal RRSPs may help reduce the total tax you pay if one partner earns more than the other too. Additionally, you can use money from your RRSP to pay for your first home under the Home Buyer’s Plan, or for higher education under the Lifelong Learning Plan.

Registered Retirement Income Fund (RRIF)

An RRIF is basically part two of your RRSP. It is also tax-deferred, meaning money in the account grows tax-free until you start making withdrawals. The difference is that you can no longer make contributions to the account. The word to focus on here is “income,” as this account provides money to live on once you are retired.

• Age Limitations: You must be at least 55 years old to convert all or part of your RRSP to an RRIF. If you have not shifted all of it by December 31 of the year you turn 71, your financial institution will notify you that it must be done and provide you with the information needed to make the adjustment.
• Mandatory Minimum Withdrawals: Once you have transitioned your RRSP into an RRIF, you are required to take money from it – and pay tax on that amount – on an annual basis starting the year after you set it up. The minimum amount is based on your age and a percentage of the value of the account on the first day of the year after you have made the conversion. The younger you are, the less you are required to withdraw. As you age, the percentage increases, starting at 2.86% when 55 years old and increasing gradually to 20% for those 95+ years old.
• Tax Considerations: The more money in your RRIF, the more you will pay in taxes. However, there are a few things you can do to reduce what you owe. If your spouse is younger than you are, you can base your required annual withdrawal on their age, locking in lower minimum payments. You can also reduce the taxes you owe by “splitting” up to 50% of your RRIF income with a lower-income spouse. Another option, if you don’t need the money, is to contribute your required minimum withdrawal to your TFSA, as long as you have room, to allow the money to continue to grow tax-free.

Tax-Free Home Savings Home Savings account

The FHSA offers prospective first-time home buyers the ability to save up to $40,000 tax-free.

Like registered retirement savings plans (RRSP), contributions to an FHSA would be tax deductible.

Like tax-free savings accounts (TFSA), income and gains inside an FHSA as well as withdrawals would be tax-free.

Who is eligible for this registered savings plan option?

To open an FHSA, you must:

• be an individual resident of Canada
• be at least 18 years of age
• be a first-time home buyer, which means you, or your spouse/common-law partner did not own a qualifying home that you lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years

How much can you contribute?

You can contribute up to $40,000 over your lifetime and up to $8,000 in any one year, including 2023 even though the rules don’t come into effect until April 1, 2023.

You may carry forward up to $8,000 of your unused annual contribution amount to use in a later year (subject to the lifetime contribution limit). For example, if you open an FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024. Carry-forward amounts do not start accumulating until after you open an FHSA.

Like TFSAs and RRSPs, a tax on overcontributions to an FHSA would apply for each month (or part-month) that the account is over the limits. The tax applies at the rate of 1% to the highest amount of the excess that existed in that month.

Finally, like RRSPs, you can contribute but defer the deduction until a later year.

What types of investments can an FHSA hold?

Permitted investments for FHSAs are the same as for TFSAs. These include mutual funds, publicly traded securities, government, and corporate bonds, and guaranteed investment certificates.

Any funds left over after making a qualifying withdrawal can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax-deferred, as long as you transfer the remaining funds by December 31 of the following year, since the plan stops being an FHSA at that time. Transfers do not reduce or limit your available RRSP room.

If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld.

Finally, withdrawals and transfers do not replenish FHSA contribution limits.

Registered Disability savings plan

A registered disability savings plan (RDSP) is a registered savings plan option intended to help parents and others save for the long-term financial security of a person who is eligible for the disability tax credit (DTC).

Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included as income to the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant (grant), the Canada disability savings bond (bond), investment income earned in the plan, and the proceeds from rollovers are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.

Who is eligible for this registered savings plan option?

The individual meets all of the following criteria:

• Is eligible for the disability tax credit (DTC) (unless transferring from an existing RDSP to a new RDSP).
• Has a valid social insurance number (SIN).
• Is a resident in Canada when the plan is entered into.
• Is under the age of 60 (a plan can be opened for an individual until the end of the year in which they turn 59).
• This limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.

How much can you contribute to this registered savings plan option?

There is no annual limit on amounts that can be contributed to an RDSP of a particular beneficiary in a given year. However, the overall lifetime limit for a particular beneficiary is $200,000 (all previous contributions and rollovers that have been made to an RDSP of a particular beneficiary will reduce this amount). Contributions are permitted until the end of the year in which the beneficiary turns 59.

If you want help evaluating your options and determining which path best meets your needs, we are here to help. Contact your RSW advisor or email info@rsw.ca to set up an appointment.