My wife and I are recent homeowners with young children. We would like to begin setting aside some savings. However, we cannot decide which savings vehicle would be best for us.
Maureen and Josh
As RRSP season fast approaches, retirement issues become a concern. There is no right or wrong answer, but what is best for you at a specific point in your life.
Many people choose to follow the traditional path. At first, the priority is securing a good job. Finding the right mate and managing the cost of a wedding. Becoming a homeowner follows not too far behind. Starting a family happens sooner rather than later.
Recent statistics indicate a decline in RRSP contributions. This is startling, since baby boomers are increasingly heading into retirement. A Government Pension and Old Age Security may not suffice for most. The vast majority of Canadians contribute nothing. The ones that can do, the ones that can’t, don’t. Not surprising!
A quick comparison of registered accounts may help with your decision.
Registered Retirement Savings Account (RRSP):
• Annual contribution allowed — 18 per cent of prior year’s earned income (maximum $21,000 for 2009)
• Tax deduction — If your tax bracket is 40 per cent, then every $100 contributed will save $40.
• No tax on investment income
• Must collapse at age 71 (withdrawals taxed prior to this age)
Tax Free Savings Account (TFSA):
• Maximum $5,000 per year (missed contributions accumulate)
• No tax deduction
• Can withdraw anytime without tax
• No tax on investment income
Registered Education Savings Plan (RESP):
• 20 per cent grant for first $2,500 contribution
• No tax on investment income, if kept for child’s education
• $50,000 maximum per child
• No tax deduction
If you can do all, then go for it. Unfortunately, for many that is not a reality. Sit down and spend an hour or two with a financial adviser. It could be the most well invested time spent.
– Henry Choo Chong, CGA, can be reached at choochonghcga@yahoo.ca and 416-485-5225.
Correction – January 26, 2010, 4:35 p.m. EST: A previous version of this story contained incorrect information. In regards to an RESP, it was written that you can get 25 per cent grant on a $2,500 contribution. It is actually 20 per cent. As well, the RRSP contribution limit is actually 18 per cent of the previous year’s income, not 20 per cent. It has since been corrected above.
