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 However, remember that funds withdrawn from your RRSP cannot be re-contributed at a later date.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.
BOC maintains overnight rate target at 1/2 per cent; projects moderate growth in Q2
The Bank of Canada is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Inflation is broadly in line with the Banks projection in its April Monetary Policy Report (MPR). Food prices continue to decline, mainly because of intense retail competition, pushing inflation temporarily lower. The Banks three measures of core inflation remain below two per cent and wage growth is still subdued, consistent with ongoing excess capacity in the economy. The global economy continues to gain traction and recent developments reinforce the Banks view that growth will gradually strengthen and broaden over the projection horizon. As anticipated, growth in the United States during the first quarter was weak, reflecting mostly temporary factors. Recent data point to a rebound in the second quarter. The uncertainties outlined in the April MPR continue to cloud the global and Canadian outlooks.
The Canadian economys adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment. Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions. Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets. Meanwhile, export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges. The Banks monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.
All things considered, Governing Council judges that the current degree of monetary stimulus is appropriate at present, and maintains the target for the overnight rate at 1/2 per cent.
Canadian home sales drop in April
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined in April 2017.
National home sales fell 1.7% from March to April.
Actual (not seasonally adjusted) activity in April was down 7.5% from a year earlier.
The number of newly listed homes jumped 10% from March to April.
The MLS Home Price Index (HPI) was up 19.8% year-over-year (y-o-y) in April 2017.
The national average sale price rose 10.4% y-o-y in April.
Home sales over Canadian MLS Systems fell by 1.7% in April 2017 from the all-time record set in March. April sales were down from the previous month in close to two-thirds of all local markets, led by the Greater Toronto Area (GTA) and offset by gains in Greater Vancouver and the Fraser Valley.
Actual (not seasonally adjusted) activity was down 7.5% year-over-year, with declines in close to 70% of all local markets. Sales were down most in the Lower Mainland of British Columbia, where activity continues to run well below last years record-levels. The GTA also factored in the decline, with faded activity compared to record levels set in April last year.
Sales in Vancouver are down from record levels in the first half of last year but the gap has started to close, CREA President Andrew Peck. Meanwhile, sales are up in Calgary and Edmonton from last years lows and trending higher in Ottawa and Montreal. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to.
Homebuyers and sellers both reacted to the recent Ontario government policy announcement aimed at cooling housing markets in and around Toronto, said Gregory Klump, CREAs Chief Economist. The number of new listings in April spiked to record levels in the GTA, Oakville-Milton, Hamilton-Burlington and Kitchener-Waterloo, where there had been a severe supply shortage. And with only ten days to go between the announcement and the end of the month, sales in each of these markets were down from the previous month. It suggests these housing markets have started to cool. Policy makers will no doubt continue to keep a close eye on the combined effect of federal and provincial measures aimed at cooling housing markets of particular concern, while avoiding further regulatory changes that risk producing collateral damage in communities where the housing market is well balanced or already favours buyers.