RRSP, RESP, TFSA…..oh my!
Everybody has heard of them (mostly thanks to the extensive marketing efforts of the big banks and investment companies). But I am pretty sure these things were created for the individuals (aka taxpayers), not the financial institutions.
Hence what I see as a major “conflict of interest” – banks make money if you hold these investments, regardless of whether they are right for you or not.
Quite a few people out there have one at least one of these types of investments, many will have all three. Don’t get me wrong, these are all very good vehicles for saving, IF they are used (and understood) properly. Here’s my quick rundown on each:
- will reduce your tax debt in year of contribution (assuming claimed)
- “may” create a tax refund, but not necessarily
- different levels of income will benefit differently (the higher your income, the higher the % tax savings)
- it is possible that you may pay MORE tax when you take the money out vs the tax you save when you contribute
- it may not make sense to contribute to an RRSP in the early years when not earning much
- it may not make sense to contribute to an RRSP when nearing retirement
SUMMARY – each individual is just that, individual, and so should be their RRSP strategies. Even with people earning the same income, RRSP strategies may be quite different based on a variety of other influences.
- provide an excellent “guaranteed” return from the government in the form of the grant portion (20%)
- allow for “pushing” investment income to a child to realize probable lower tax rates
- have no up-front tax break on contribution
- are quite flexible if path of higher education is not chosen
SUMMARY – these are a great way to put aside funds for education. But, they too, have their limits and pros/cons for certain individuals.
- I think these are probably the most misunderstood/misused
- no tax break on way in, no tax cost on way out
- provides tax-free growth
- to get full advantage, should not be used simply as a savings account
SUMMARY – these can provide a major source of wealth accumulation if used properly. The main goal is to hold the assets with the biggest growth/earnings potential within. Simply parking cash in here earning 0.5% does not really accomplish much.
Some may argue with a few of my points, and yes, I have been a little vague in certain areas. But your take-home from this should simply be – don’t blindly follow the banks marketing promotions. Take a real look at your own situation and be sure you truly understand what each type of investment can do for you. It’s YOUR money and if you can do some little things to make it grow bigger, do it!