The answer is…it depends. There are many colours of investment vehicles and we must consider the different shades available and the overall effect that we want to achieve.
RRSPs: A Matte Finish
The Registered Retirement Savings Plan is the preferred choice if you’re in a “high” tax bracket and you expect to be in a lower tax bracket in your retirement years. This allows you to get a tax reduction now at the higher rate and you will pay less tax in the future when you withdraw the money; however, the full amount that you withdraw is taxable when you take it out.
March 1, 2017, is the RRSP deadline to contribute for the 2016 taxation year.
Tax Free Savings Accounts: A Glossy Finish
Deposits to the TFSA are made with after-tax dollars and do not trigger a tax deduction. You money will grow and when you withdraw from your account, you will not be taxed. This would be ideal if you plan on taking the money out when you are in a higher tax bracket than you are in now – you have basically “locked in” the lower tax rate that the money was taxed at.
The Answer is Clear Then…Isn’t it?
There are other considerations as well.
Withdraws from an RRSP (or an “RRIF” Registered Retirement Income Fund) are taxable. In your retirement years, if you are collecting Old Age Security (OAS) or the Guaranteed Income Supplement (GIS), there may be a “clawback” triggered by your higher income levels. That is, your benefits will be reduced by between 15% to 50% on the dollar, depending on your income situation when you withdraw the funds.
In addition, there are limits to how much you can contribute to either plan. Over-contributions to either will result in significant penalties.
If your employer also matches contributions to your RRSP, this is the clear hands-down winner.
If you have children, you may consider contributing to their future RESP instead, to take advantage of government grants that are available. The government will match 20% of your contributions for each child to an annual maximum grant of $500 per year.
Do you have a mortgage? You might consider chipping away at that because while interest rates are low at the moment, a payment towards the principal will reduce the interest payments over the life of the mortgage.
Some people might even consider investing in artwork instead. It may retain its value and even appreciate over the years.
So What Should I Do?
Your overall life goals and financial situation (current and future) should be considered. Consult with your financial advisor and trusted accountant to help you understand the tax rules and assumptions.
At the end of the day, some savings in any investment vehicle is better than no savings at all. Like a painting session, getting a mud brown slurry is better than not getting any paint on your paint brush.
Let OMNI help give you the confidence to pick the right option for your family.