Wednesday, September 20, 2017
5 Tax-Advantaged Places to Park Your Money
Any money you make in this country will be taxed. That is unless you wish to skirt the law, which I would never recommend. This includes employment income, commissions, and even investment income. While this can frustrate many, there are places you can put your money that have advantages for you, the taxpayer. Saving money on taxes paid is just as good as making money on investment growth. In an effort to promote individual savings, the Government of Canada has installed several tax-advantaged vehicles in which you can put your money in and let grow. In my humble opinion, it is foolish for any Canadian who is able and qualifies for these products to not take advantage. In this post, I will describe 5 Tax-Advantaged places for you to park your money in. Remember a penny saved, is a penny earned.
Tax-Free Savings Account (TFSA) – No Tax
The TFSA came into effect in 2009 and since then has gained great popularity throughout Canada. The account is essentially what the name says. Money growing inside the TFSA grows tax-free and when withdrawn, you pay no tax as well. This makes the TFSA an excellent product for short-term savings goals. Increasingly the TFSA has become a retirement savings vehicle as for those with long time horizons, the TFSA provides amazing tax efficiency. The TFSA has a yearly contribution limit of $5,500. You can, however, catch up on previous years missed contributions. You can deposit a maximum of $52,000 into your TFSA as of 2017 if you were 18 years old or older during eligible years (starting in 2009). Any withdrawal from your TFSA can be re-contributed the following year. I speak about it the TFSA a lot and it’s for good reason! Anyone looking to save must have one.
Registered Retirement Savings Plan (RRSP) – Tax Deferred and Tax Deducted
The RRSP was initially developed to help self-employed people save for their retirement. As the decline in Employer-Sponsored Pensions became more prevalent, the RRSP became the most widely used product for Canadians to save for their retirement. What makes the RRSP so popular is its great tax implications. Holders can deposit up to 18% of their earned income for the year (up to $24,930, 2015 limit). Each dollar deposited into your RRSP lowers your taxable income for the year and saves you money in the form of taxes paid. For those who do regular contributions, they often receive large tax refunds every spring. This makes it an attractive account for many Canadians. Unlike the TFSA, money withdrawn from the RRSP is taxable at the account holder’s marginal tax rate at the time of withdrawal. This is often during retirement when income is lower thus making the taxes paid lower. There are the first-time home buyers and lifelong learning plans that will allow you to withdraw early from your RRSP and pay no tax. Knowing what the conditions and tax implications of withdrawing from your RRSP are vital, so ask an expert. This is a great way to lower your taxes and save for the future!
Registered Education Savings Plan (RESP) – Tax Deferred and Free Grant Money
The RESP was designed to allow for parents to save for their child’s education in a tax-deferred vehicle. What that means is that contributions into the RESP are made with after-tax dollars so the account grows tax-free. Withdrawals from the RESP are made by the recipient (child) and they pay taxes on the withdrawals at their marginal tax rate. Why this is attractive is because when a child is in post-secondary education they pay little to no taxes thus making the RESP virtually tax-free. Another reason the RESP is so attractive is that contributors have access to the Canada Education Savings Grant (CESG). The CESG is designed to complement the RESP by adding additional funds to the account. The government may contribute up to $500 annually and up to $7,200 in the lifetime of the account. Low-income contributors are eligible for the Canadian Savings Bond which will also contribute money annually even if deposits are low. The lifetime contribution amount for the RESP is $50,000. Free money is the best kind of money in my humble opinion so taking advantage of this product is a must.
Registered Disability Savings Plan (RDSP) – Tax Deferred and Free Grant Money
The RDSP was designed to help families save for future costs associated with having a disability like health care costs and living expenses. It is similar to the RESP in so much that it is a tax-deferred product that may be eligible for government grants. To help your savings grow the government adds grants at the initial deposit and throughout the lifetime of the account. There is a lifetime contribution limit on the RDSP of $200,000 and the government may add up to $70,000 of grants and bonds. Money withdrawn from the RDSP is taxed as income. If you qualify for the Disability Tax Credit (DTC) you automatically qualify for the RDSP. With a large amount of money in the form of government grants available, the RDSP is a highly attractive product for those that qualify. Again, free money is the best kind of money so everyone who qualifies should have an RDSP.
Life Insurance – Pseudo Investment Product: No Tax
Many people think of Life Insurance as solely an insurance product. One of the selling features of it is that any proceeds of a life insurance policy in Canada are received tax-free to the beneficiary. The first two vehicles mentioned; the TFSA and RRSP have self-gratification in mind. The next two, the RESP and RDSP, have that as well, along with the benefit of a loved one. Life Insurance has the sole purpose of selflessness at its base and therefore makes a great investment for future generations. Simply put, there is no other product that on day one of its existence provides tax-free money to the beneficiary and grows at a guaranteed rate. This makes owning Life Insurance one of the best investments one can make, one the government won’t get its hands on.
Although in Canada we are taxed fairly heavily, we do gain many benefits from it as mentioned in yesterday’s post. Furthermore, these tax-advantaged vehicles are something the government has promised, for the time being, to allow Canadians to put their money in and use to their benefit. If used correctly and completely, anyone can achieve many goals in life including education, savings, and retirement along with leaving a lasting legacy. This is why tax-efficiency is crucial in any investment plan. Ask any seasoned investor; saving money in the form of losses and taxes is just as important as making money with good returns. Do both and you will be one happy person!
Thanks for reading my post today and don’t forget to tune in tomorrow where I will discuss tax deductions that can save you money when you file. If you have any questions regarding investments or insurance, feel free to message me at firstname.lastname@example.org. Have a great day friends!
“People try to live within their income so they can afford to pay taxes to a government that can’t live within its income.” – Robert Half
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