Recently, I was asked to provide a writing sample for the financial industry. Using the quickly approaching RRSP contribution deadline for 2017 (March 1st, 2018) as inspiration, I wrote the below (*NOT advice; to be used for informational purposes only):
Financial Industry, writing example: RRSP vs. TFSA (target audience: youth) February 2018
*Please note that this article is intended as a writing sample only, and is therefore not a complete examination of the two account types. I would edit the below to highlight the important information, as requested by the company.
Investing in your future
As a millennial, you have the world at your fingertips, but how should you invest your hard-earned savings?
In Canada, there are two accounts that young adults should maintain: the RRSP (Registered Retirement Savings Plan; no age restriction to start, but a parent/guardian maintains signing authority until a minor reaches the age of majority) and the TFSA (Tax-Free Savings Account; must have reached the age of majority).
Both accounts can hold a variety of investments (including, but not limited to: stocks, bonds, GICs and mutual funds), but the two accounts are very different.
So which one should you invest in first? Well, it depends upon your goals. Are you saving for your retirement, or just a rainy day?
RRSP: The power of compounding
If you have employment history, you can use an RRSP to start saving for retirement.
Think you’re too young to save for retirement? Think again.
Time is on your side. So use it.
Even if you save a little bit ($50/month for example), the power of compounding (which Albert Einstein called the eighth wonder of the world, and Warren Buffett maintains is the most important factor to achieving financial success) will provide you greater financial wealth than those who saved more than you, but started investing years later. (Check out these examples from Business Insider. In example 1, Susan invests for only 10 years early in her career, but she still ends up with more money than Bill, who invested for his retirement over 30 years, beginning late in his career.)
Your most current Notice of Assessment from the CRA (Canada Revenue Agency) indicates how much contribution room you have available to you (this is the amount you can deposit in your RRSP). Contribution room is accumulated based upon your earnings (18%; up to a maximum of $26,010 in 2017. Please be advised that participation in a company sponsored pension plan impacts the contribution room in your RRSP). You can continue to make contributions to your RRSP until December 31st of the year in which you turn 71 years of age.
All funds that are invested in your RRSP are tax-deferred. This means that the amount you invest in your RRSP by March 1st, 2018 will be deducted from your taxable income when you file your taxes for the 2017 calendar year.
The tax is deferred…
You pay taxes on the amount you withdraw as income years later in retirement. (*Please note that there are restrictions and tax implications if you choose to withdraw money from your RRSP before retirement.)
In the short term: you reduce your taxable income, which may reduce the amount of tax you must pay. In the long term: you benefit (greatly) from compound interest.
Invest in your RRSP for your retirement. March 1st, 2018- the deadline to contribute to your RRSP for the 2017 calendar year- is quickly approaching! Please talk to your financial advisor today.
Tax-Free Savings Account (TFSA)
The TFSA was introduced in 2009. Unlike the RRSP, the amount that you can invest in your TFSA does not depend upon the income you earn. The interest and capital gains that your investments earn in this account are tax-free! Your TFSA can be used for anything, NOT just retirement.
How much can I invest in a TFSA?
As of 2018, if you are the age of majority (18 years old in Ontario) and you are a Canadian resident, you can invest $5,500 per year (*annual contribution limit is subject to change by the federal government). If you were the age of majority in 2009, you can invest a total of $57,500 in 2018, as contributions carry-forward!
Taxes
Unlike an RRSP, contributions to your TFSA are not tax-deferred. The money you invest in your TFSA remains taxable income, but you do not pay tax on any capital gains or interest the investments in your TFSA accumulate.
Going on vacation, or renovating your home? No problem! Withdrawing money from your TFSA is easy! (*Restrictions exist on certain investments.) You can even re-invest the money that you’ve withdrawn into your TFSA next year!
*Remember not to invest more than your contribution limit (including carry-forward), as the CRA will tax over-contributions at a rate of 1% per month on the excess amount.
In short: The TFSA can be used to fund your retirement or any other financial goal. It allows for easier access of your money than in your RRSP (*restrictions on certain investments). Speak to your trusted financial advisor today!
References available upon request.
*Please note that the above is intended for informational purposes only. It does not constitute advice, as I am not a financial advisor. Please speak to your trusted financial advisor about your unique financial situation.