Should I contribute to a TFSA, RRSP or both?
Should I contribute to a TFSA, RRSP or both?
With the Tax-Free Savings Account (TFSA) available for saving in a tax-free environment, does it still make sense to contribute to a Registered Retirement Savings Plan (RRSP)?
RRSPs can work well if you contribute while you are in a high tax bracket and withdraw when in a lower tax bracket. You can generate a higher net rate of return with an RRSP when the effective tax rate at the time of withdrawal is lower than the effective tax rate at the time of contribution. A TFSA can provide a higher return if the reverse occurs.
For example, if you contribute $1,000 to an RRSP when you are in a 20 per cent tax bracket, your net cost is $800 after the tax savings. If you are in the same tax bracket when you make a withdrawal from your RRSP, your net withdrawal will be equal to your net cost after paying the taxes ($800). However, if you are in a higher tax bracket when you make the withdrawal, say 40 per cent, then your net withdrawal will only be $600 after the taxes are paid (assuming market is flat and there is no return).
TFSA, RRSP OR BOTH?
A TFSA can be an ideal savings vehicle if you are in a low income tax bracket. RRSPs may not be well suited to low income Canadians. The RRSP tax savings are insignificant and you may be in a higher tax bracket when you make withdrawals, as the earlier example demonstrates. You may also want to consider that TFSA withdrawals do not impact income tested benefits and credits, such as child tax benefits and credits, Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
If you now find yourself in a lower tax bracket, such as when on maternity leave, and have made RRSP contributions in the past, you may want to consider withdrawing from your RRSP to make a TFSA contribution. However, remember that funds withdrawn from your RRSP cannot be re-contributed at a later date.
One strategy would be to contribute to your TFSA now and accumulate RRSP room to be used later when in a higher tax bracket to optimize the tax benefits.
This is a situation where you may want to maximize both your RRSP and TFSA contributions. In fact, the tax savings or refund received from the RRSP contribution could be used to fund the TFSA.
YOU MAY WANT TO RETHINK YOUR HOME BUYERS PLAN SAVINGS
If you are saving for a down payment on a house, a TFSA might be a better option than saving in an RRSP and withdrawing under the Home Buyers Plan (HBP). There are several reasons for this.
■ The flexibility to recontribute the TFSA withdrawal without time limits.1 If HBP repayments are not made on time, the annual repayment amount is added into your income and any missed repayment amount means the RRSP room is lost forever
■ There is no restriction on how much you can withdraw from your TFSA while the HBP restricts you to $25,000 from each your RRSP and your spouses RRSP. Alternatively, you could each contribute $5,000 a year for 5 years to a TFSA and then withdraw $25,000 plus any investment earnings tax free and with no required repayments
■ There are no conditions on TFSA withdrawals, whereas the HBP requires you to be a first time home buyer.
Similar logic could be applied to the Life Long Learning Plan. By using a TFSA to save and fund continuing education, contributors can gain increased withdrawal flexibility while eliminating any enrollment requirements or repayment conditions.
Whether to save in a TFSA, RRSP or both may depend on your savings needs, your eligibility for income tested benefits and your current and expected future financial situation and income level.
1 Amounts withdrawn in a taxation year will be reflected in contribution room in the following year.
Article courtesy of Manulife Financial and should not be relied upon for investment or tax advice. It is recommended to speak to a financial planner to review your particular situation.
Canadian home sales fall further in July
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined further in July 2017. Highlights:
National home sales fell 2.1% from June to July.
Actual (not seasonally adjusted) activity in July stood 11.9% below last Julys level.
The number of newly listed homes edged back by 1.8% from June to July.
The MLS Home Price Index (HPI) was up 12.9% year-over-year (y-o-y) in July 2017.
The national average sale price edged down by 0.3% y-o-y in July.
Julys interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer, said CREA President Andrew Peck. Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to.
July marked the smallest monthly decline in Greater Golden Horseshoe home sales since Ontarios Fair Housing Plan was announced in April, said Gregory Klump, CREAs Chief Economist. This suggests sales may be starting to bottom out amid stabilizing housing market sentiment. Time will tell whether thats indeed the case once the transitory boost by buyers with pre-approved mortgages fades.
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Decline in single-family component moderated by gain in multi-family dwellings
Canadian municipalities issued $8.1 billion worth of building permits in June, up 2.5% from May and the second highest value on record. Higher construction intentions for multi-family dwellings and commercial buildings were mainly responsible for the national increase. All building components reported gains in June, except for single-family dwellings.
The value of residential building permits fell 0.9% in June to $5.0 billion, the fourth decrease in five months. The decline was mainly the result of lower construction intentions in four provinces, notably Ontario.
In June, the value of permits for single-family dwellings decreased 12.5% to $2.4 billion. Seven provinces registered declines, with Ontario being the main contributor to the decrease.
Conversely, construction intentions for multi-family dwellings rose 12.5% in June to $2.7 billion, marking a third consecutive monthly increase. Seven provinces registered gains, led by Ontario and British Columbia.
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