TFSAs, RRSPs, and why you shouldn’t care
“Why don’t they teach you this stuff in school?!”
Every tax season, the inevitable conversation comes up. What’s my TFSA contribution limit, how much can I invest in my RRSPs, did I even beat inflation, how can I make my money work for me? Can you afford to hire an Accountant and an Investment Consultant who can answer all these questions? Or you’re like millions of Canadians living paycheck to paycheck, and don’t have the time or income to even consider investing. No matter where you land on the money saving scale TFSAs and RRSPs aren’t designed to help you, they’re here to put your money to work for someone else.
So what is a TFSA/RRSP? Tax Free Savings Accounts (TFSA) or Registered Retirement Savings Plans (RRSP) are special account used to shelter your money from taxes. Any money invested into an RRSP doesn’t count towards your income, so that one day when you’re income is lower you can withdraw that money as income. Money invested into a TFSA doesn’t incur Capital Gains taxes, so once you’ve invested it you don’t have to pay income tax on any money you make. There are limits to how much you can put into each account based on your age and how much you earn.
I’ve written out an example of how RRSPs should work here in case you don’t know.
Income tax is charged based on how much money you make or your bracket, to keep things simple I’ve made up a tax bracket system that is roughly equal to the 2023 federal tax bracket rates.
fake federal tax bracket rates
15% up to $50,000 of taxable income ($7,500)
20% between $50,000 and $100,000 ($10,000)
25% between $100,000 and $150,000 ($12,500)
30% between $150,000 up to $225,000 ($22,500)
35% on any amount taxable income exceeding $225,000
RRSPs - The Ideal Scenario
Let’s say that Bob makes a $120,000 per year salary. Go Bob! Bob’s income tax every year is $22,500, so at the end of the year he takes home $97,500. Like all of us, Bob doesn’t like looking at his paycheck and seeing a portion of it going to income tax. So what can he do to pay less income tax? Use his RRSP account! Bob invests $20,000 into an RRSP, which makes his effective income for the year $100,000. Now he’ll pay $17,500 in income tax and take home $82,500. Notice that by keeping his income under $100,000 he doesn’t have to pay the extra 5% on that extra $20,000. That’s $5,000 less income tax and Bob has a savings account with $20,000 in it. Go Bob!
20 years later.
Bob has continued to save money into his RRSP and is ready to retire, he now has $400,000 in there. By using this account he’s avoided paying $100,000 in income tax too (for now). Bob can now take out the money from his RRSP at a lower tax rate and reap the rewards of his savings. He withdraws $50,000/year as income, paying $7,500 of that toward income tax and taking home $42,500. Over the next 8 years Bob is able to withdraw $400,000 and only pay 15% tax on it ($60,000). After 20 years of savings and 8 years of retirement Bob has avoided paying $40,000 total in income tax, or $2,000 per year.
Why you shouldn’t care
Don’t worry about sounding professional. Sound like you. There are over 1.5 billion websites out there, but your story is what’s going to separate this one from the rest. If you read the words back and don’t hear your own voice in your head, that’s a good sign you still have more work to do.
Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.
