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Saving for the future is important, and though income levels may not always make it easy, it is a prudent move.
Saving schemes, and pension plans vary from country to country, as a result, most immigrants might not be familiar with the Canadian methods. In fact, not every country offers a pension scheme as Canada does. For instance, in Sri Lanka, government-administered pensions are available only to public servants. Those working in the private sector contribute to a scheme known as Employment Provident Funds and Employee Trust Funds. There are also other savings schemes offered by banks.
Irrespective of whether a Canadian is employed with the public or private sector, they are eligible for a pension on retirement upon meeting certain conditions. Other retirement savings options are available to residents in Canada, some with the ability to withdraw at any time and others only at retirement. Two common savings accounts available in Canada are the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA).
To understand how these plans work, Immigrant Muse asked Brenda Akins, Associate Portfolio Manage, Kozak Financial Group, CIBC Private Wealth, and here are her responses.
What are RRSPs and TFSAs?
A Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are both Registered Savings Plans available to Canadian residents who have social insurance numbers. RRSPs were introduced in Canada in 1957 while TFSAs were introduced in 2009. RRSPs are designed to help Canadians save for retirement. TFSAs help Canadians increase savings which may be used to fund retirement or any other financial goal.
What are the differences between the two plans?
| RRSP | TFSA | |
| Contributions | Contributions give you a tax credit | Contributions do not give you a tax credit |
| Contribution Room | Determined by income | Not determined by income. Annual universal amounts are set by the government |
| Withdrawals | Funds are taxable when withdrawn* | Funds are not taxable when withdrawn |
| Withdrawals cannot be re-contributed* | Withdrawals can be re-contributed the following calendar year | |
| Withdrawals are mandatory at age 72 | No mandatory withdrawals | |
| Maximum Age | Contributions can be made up to age 71 | No age limit on contributions |
Can someone invest in both plans?
Yes, they both have advantages.
Can someone have more than one RRSP and TFSA?
An individual can have more than one RRSP and TFSA, however there are tax penalties for overcontributing.
What factors should be considered before choosing a plan?
Factors to consider when choosing a plan are time frame and purpose of the funds. If the investor plans on withdrawing the funds for a big-ticket purchase or using the funds as an emergency fund, the TFSA is a great choice. When the investor is saving for future retirement income, the RRSP can make more sense. Another factor is expected tax rate at the time of retirement. If the marginal tax rate is expected to be higher at the time the funds are withdrawn when compared to the marginal tax rate when the funds are contributed, then the TFSA may be better. If an investor can only invest in one plan they should start with the TFSA.
Some immigrants could be in their 40s or 50s when they arrive in Canada. Considering that they would be retiring in 15 to 20 years, should they contribute more into their plans?
Investors who are in the 40s or 50s who have 15-20 years before retirement age should contribute more to their plans to take advantage of tax deferred growth in the case of the RRP or tax-free growth in the case of the TFSA
If they have smaller incomes, how should they proceed towards retirement savings?
If an individual has a smaller income the TFSA is a good choice. Funds can be withdrawn if needed and re-contributed in a future calendar year.
How much of their income should self-employed people invest to ensure a financially secure retirement?
The question of how much income an investor should invest to ensure a financially secure retirement is very personal. Every retirement plan is different. The best recommendation is to keep a record of your spending for a few months and then meet with a Qualified Financial Planner to prepare retirement income projections.
At any point would they have to pay tax on these plans?
Tax will be paid on RRSP income when it is withdrawn. If you buy a foreign stock in your TFSA, you may be subject to foreign withholding tax.
What are the benefits of participating in employer-funded retirement plans?
Employer-funded retirement plans give you the opportunity to receive employer matched contributions.
Is there anything else investors must know about these plans?
- Investors don’t lose contribution room for either an RRSP or TFSA if a contribution isn’t made one year.
- Both RRSP and TFSA can have a designated beneficiary. If a spouse is named as beneficiary (successor annuitant) funds will transfer to the surviving spouse tax free upon passing.
- Investors should consider the tax consequences for registered plans if they were to become a non-resident in the future.
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