Many Canadians aren’t taking full advantage of TFSAs, focusing too much on the 'savings account' aspect, some advisors say.iStockPhoto / Getty Images
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Canadians have two key investment vehicles available to put money away tax-efficiently for retirement and other big-ticket purchases: the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA).
Financial advisors have a special role to play in informing investors about each of these tools’ properties and provide strategies to help them take advantage of them for their respective needs. Advisors also need to keep clients abreast of changes to these vehicles as well as mistakes to avoid – not to mention their limitations.
These 10 articles published on Globe Advisor in 2022 focus on some key strategies for making the most of RRSPs and TFSAs:
Why the CRA wants a closer look at investments held in RRSPs
Starting in the 2023 taxation year, banks will be required to report the total fair market value of property held in the RRSPs and registered retirement income funds (RRIFs) they administer. The aim is to “assist the Canada Revenue Agency in its risk-assessment activities regarding qualified investments held by RRSPs and RRIFs,” the federal budget document said. One expert says the implication is retirement accounts with “particularly high” balances are going to be tracked and reviewed – with attention most likely to focus on particular private or “non-arm’s-length securities.”
Does it make sense for Canadians in their 60s to make RRSP contributions?
Retirement doesn’t always mean leaving the workforce without a backward glance. Some retirees shift to part-time work, pick up consulting jobs, or start a business. So, should people in their 60s with earned income still be contributing to an RRSP? That depends. For those who are already in a low marginal tax rate, the tax savings resulting from an RRSP contribution are modest and the money won’t have much time to benefit from tax-deferred compounding within the RRSP.
When is it better to use an RRSP, a TFSA – or both?
Canadian investors face a conundrum – whether to put their money in a TFSA versus an RRSP. More specifically, is there a way to use both to maximize returns and save on taxes? The question is a fundamental one all advisors must address as they help clients with their investment accounts. While there are some basic rules of thumb, advisors have different approaches when guiding clients around this issue.
Why withdrawing early from RRSPs to pay down debt can lead to ‘regret’
When clients face a financial crunch, some hastily tap into their RRSPs to get by without considering the consequences. But withdrawing from an RRSP before retirement means paying more taxes. Furthermore, any withdrawal is tacked onto their annual income, potentially pushing clients into a higher tax bracket come tax time, says Lana Gilbertson, senior vice president and licensed insolvency trustee at MNP Ltd. in Vancouver. “They also lose their contribution room permanently as what they take out of an RRSP can’t be put back.”
Here are some big mistakes to avoid when trying to meet that March RRSP deadline
The rush to meet the RRSP deadline is a ritual early every year as Canadians try to max out their contributions and reap the greatest tax savings. However, advisors worry this frantic flurry to March 1 brings with it all kinds of problems, from investors getting attracted to the latest shiny trend to the fact these hasty contributions come at the expense of measured investment strategies. Such mistakes can be avoided and fixed by gearing RRSP decisions to investment goals, portfolio management, and long-term tax efficiency strategies.
How middle-aged Canadians can make up for lost time on RRSPs
As the annual RRSP contribution season hits full stride, advisors are helping some middle-aged clients play catch-up on their retirement savings. Kelly Ho, partner and certified financial planner at DLD Financial Group Ltd. in Vancouver, has several clients in their 40s and 50s who have unused contribution room and want to accelerate retirement savings now that pricey items such as mortgages or child care are off their balance sheets. But strategies for middle-aged clients who want to catch up for lost time with RRSPs vary depending on circumstances and risk tolerance.
How to use TFSAs effectively to maximize investment returns
Many Canadians aren’t taking full advantage of TFSAs, focusing too much on the “savings account” aspect, some advisors say. While TFSAs seem simple enough – put money in and it can grow tax-free – there are many rules surrounding the program that continue to confuse Canadians. In fact, a recent Bank of Montreal survey found that cash is the most popular asset in TFSAs as 43 per cent of Canadians say they use the TFSA as a savings account. Advisors say there are several strategies clients can use to maximize the return on investments in TFSAs.
How to maximize the flexibility that spousal RRSPs add to retirement planning
Canadians have been able to split pension income, including withdrawals from registered retirement income funds since 2007 – but that doesn’t mean spousal or common-law RRSPs don’t still have a place in many couples’ retirement planning. Patrick Briscoe, financial advisor at IPC Investment Corp. in London, Ont., says the most common scenario in which a spousal RRSP makes sense is when one spouse has a higher income now and therefore is likely to have a higher income in retirement.
When TFSAs make sense for Americans living in Canada
The commonly held belief that Americans can’t or shouldn’t use TFSAs is misguided, argues Jason Pereira of Woodgate Financial Inc. in Toronto. Specifically, advisors have recommended Americans living in Canada stay away from this account type since they were first created in 2009 as the U.S. Internal Revenue Service doesn’t recognize TFSAs as tax-free. But while this was the correct approach when they launched and the limit was $5,000 a year, conventional wisdom no longer applies given the current lifetime limit of $81,500.
Why it’s time to get clients to think beyond RRSPs when planning for retirement
While RRSPs play a critical role in retirement planning, they’re not the be-all and end-all, suggests Damon Murchison, president and chief executive officer at Winnipeg-based IG Wealth Management. According to a survey his firm conducted, almost two-thirds of Canadians report having an RRSP account with an average amount of $133,000. Yet, the findings also suggest most Canadians have not thought beyond their RRSP when planning for retirement and remain unsure about other financial factors – including how they’ll be taxed, monthly budgeting, insurance needs, and estate planning.
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