Use year-long tax breaks to save
One of the most popular savings strategies is to pay yourself first, not last. Any time you get paid, take a little off the top and stash it into savings where it can grow. If you wait and pay yourself last, you may find you get to the end of the money before you reach the end of the month!
If you save in a “non-registered" savings or investment account, there are no special tax rules governing contributions and withdrawals, and you have to pay tax on the investment income you earn. However, if you save in registered accounts like a Registered Retirement Savings Plan (called RSP at Tangerine) or a Tax-Free Savings Account (TFSA), you can take advantage of certain tax breaks that will help you reach your goals faster.
RSPs vs. TFSAs
Although RSPs and TFSAs share some common tax advantages, there are also some key differences:
|
|
RSP |
TFSA |
|
Minimum age to open |
No |
Yes - 18 |
|
Age limit for making contributions |
Yes[1] |
No |
|
Must have “earned income” to contribute |
Yes |
No |
|
Intended for retirement |
Yes |
No[2] |
|
Contributions are tax deductible |
Yes |
No |
|
Withdrawals are taxable |
Yes |
No |
|
Income earned in the plan is tax-free |
Yes |
Yes |
|
Annual contribution limits |
Yes |
Yes |
|
Contribution room is cumulative |
Yes |
Yes |
|
Holds different types of investments eg. stocks, GICs, index funds |
Yes |
Yes |
Which plan is right for you?
You don't have to choose one over the other — you can invest in both. While an RSP is designed to help you save for retirement, a TFSA is much more flexible and can be used to save for any goal: a vacation, a down payment, or an emergency fund.
You may also want to consider the timing of taxes. With an RSP, you defer taxes until the money is withdrawn, normally at retirement, which is an advantage if your marginal tax rate in retirement is lower than it is today. With a TFSA, generally you pay no tax when you withdraw your money, which is an advantage if your marginal tax rate is higher at that time than it is today. This video has even more tips.
The importance of saving year-round
Unfortunately, many of us don't prioritize saving, and we wait until there is a compelling event, like the RSP deadline, or the end of the calendar year, to save. But paying yourself first and making it automatic, through the use of regular, automatic transfers to an RSP or TFSA, takes the self-discipline out of the equation and results in regular savings, month in and month out.
Where can I find the money to save?
Try examining your little indulgences and unnecessary spending that can really add up, like fancy coffees, fast food lunches and taxi rides. It's low-hanging fruit — an easy place to cut back or eliminate spending and save instead. Making "small sacrifices" can lead to big savings.
[1] You can only hold RSPs until the end of the year you turn 71.
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