Dr Mark Walker remarks on retirement savings - TFSA vs RRSP

Despite Canada being a relatively young country - in fact, 148 years young this year - our population is steadily aging. Approximately 15.3 percent of the Canadian population is over the age of 65. That number is expected to grow to 23.6 in the next 15 years as more baby boomers reach the age of retirement. It’s estimated that by 2063, the number of Canadians aged 80 years and over will reach nearly five million, compared with 1.4 million in 2013.

With a quarter of the population poised to retire in the next two decades, Registered Retirement Savings Plans, pensions, tax-free savings accounts and retirement capital are front and center on the minds of many Canadians.

The two main ways people save for retirement are with tax free savings accounts (TFSA) and Registered Retirement Savings Plans (RRSP). While there is no rule preventing a person from having both, each offer their own unique set of benefits that one should become familiar with before they decide to choose one or both.

RRSPs

The Canadian RRSP was introduced in 1957 as a means to help Canadians save for their golden years. The RRSP can hold a number of financial assets, including: GICs, stocks, mutual funds and bonds. RRSPs are something like a retirement basket of investments, sheltered from government taxation. RRSP contributions can be made until December 31 of the year that the account holder turns 71. The contribution amount varies per account and can be found on your current tax return paperwork.

RRSPs are not taxed until withdrawals are made because it is a tax deferral program. The intention is that withdrawals will not be made until one is retired with a reduced income, thus the tax will be lower. The idea is to contribute to the account to reap the tax deductions when you’re at a higher tax bracket and withdraw when you are at a lower tax bracket.

There are two exceptions that allow you to withdraw or borrow money from your own RRSP. They are: the Home Buyers Plan and the Lifelong Learning Plan. With both plans, you are expected to pay back 1/15 and 1/10 respectively of the amount you borrowed per year until the withdrawal is paid back fully.

TFSAs

TFSAs were introduced in 2009 as a means for Canadians to save money without being hit by taxes and banking fees. Any Canadian over the age of 18 can contribute to a TFSA, with the yearly maximum contribution being capped at $5,000 per year. Like the RRSP, a TFSA can also hold GICs, High Interest Savings Accounts, stocks, bonds, and other assets. Unlike an RRSP, money can be withdrawn anytime tax-free. However, if you reached your $5,000 limit for the year, you cannot add money to it again until the next year.

Retirement planning specialist and author Gordon Pape offered the following while he was interviewed by The Globe and Mail last year. RRSPs make the most sense while building a retirement plan. Average Canadians do not have larger incomes when they retire, and they can invest the tax refund they get immediately and enjoy the long-term from compound interest. “You have to look at the magic of compounding,” Pape said. “The more years you have for your money to compound in a tax-sheltered environment, the more you’re going to have at the end of the day.”

Dr. Mark Walker is a partially retired dentist in Dutton, Ontario who has used both RRSPs and TFSAs to save for his retirement. “I like having as many options as possible,” Dr. Walker mentions.

When asked which he preferred, he explained that they are both beneficial for different reasons. “TFSAs are good because you are not taxed if you need to withdraw in case of an emergency or unforeseen circumstance,” said Dr Mark Walker. “But RRSPs make me feel secure about the future because I know the set amount that will be there.”

Planning for retirement early is key. “The earlier you start, the more options you will have and the better of you will be,” Dr. Walker said. “It’s about being prepared for the next step in life with as much forethought as possible.”

As Dr Mark Walker commented, it’s never too early to start saving for retirement. Getting in the habit of making contributions will serve you in the long run. You don’t want to be ready to retire, but unable to because you didn’t financially plan.