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TFSA vs. RRSP


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I'm 20 years old right now, and I really want to start saving for my future. I hope to make a million dollars at least by the time I'm 65 years old.

 

I don't know a lot about saving money though, except that perhaps the best two options would be a TFSA or RRSP. I don't know what the difference is, nor do I even know how to get one to be honest. I don't really know much about banking at all.

 

I was hoping to put aside maybe $3000 every year.

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I'm 20 years old right now, and I really want to start saving for my future. I hope to make a million dollars at least by the time I'm 65 years old.

 

I don't know a lot about saving money though, except that perhaps the best two options would be a TFSA or RRSP. I don't know what the difference is, nor do I even know how to get one to be honest. I don't really know much about banking at all.

 

I was hoping to put aside maybe $3000 every year.

 

You can do a bit of both...you can put perhaps 1500 into an RRSP and perhaps 1500 into a TFSA. The RRSP allows you to use the amount you invest in it in that particular tax year as a tax deduction. So you can pay a little less in taxes for the tax year you are filing. However, once you pull money out of an RRSP you have to pay the taxes on it....but presumably that won't be until you retire so in the meantime you are accumulating interest, dividends or capital gains on whatever investment you made in your RRSP portfolio.

 

Money that you invest in a TFSA in a particular tax year is not tax-deductible. However, any interest, dividends or capital gains that you get over the year on that investment are not taxable. So you save on taxes in the subsequent tax years.

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It's very easy to open either or both account. Either walk into your band or credit union and ask to make an appointment, or call and make an appointment. They will be able to set you up in a day.

 

The TFSA, I'm not sure the exact in your province, but where I am at (a few provinces away) there is a cap on how much you can invest per year without being penalized. For mine it is 5,000 per year.

If you plan or think you may take money out in the next few years, putting your money there is a pretty safe bet.

You for sure can do both - TFSA and RRSPs - just think of money you put in your RRSPs as money you are going to forget about.

 

Ask someone you trust to help you find the best place to do business. Some places are better than others in terms of fees, service, how informative they are.

 

Good luck and good for you starting early.

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Consider the math involved. With a $3000/year savings over a 45 year period, you will need to have about 7% interest to make your $1M goal. And that is not considering taxes.

 

You will not get that with traditional savings accounts. The best way to make that sort of return will be to invest your money into accounts like IRAs or 401Ks.

 

Are you working? If so, does your employer participate in 401K? If so, I highly recommend looking into that. If not, you can still invest in IRA which has tax benefits. I would definitely consider talking to a professional if this type of retirement saving plan interests you.

 

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Edit: Did not realize that TFSA and RRSP were Canadian retirement savings plans similar to IRA and 401k.

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Also what I recommend to you is if you don't have a budget, start one. Determine what your debts are, to who, and focus on paying down the ones with the highest interest rates first.

 

Having a budget can put your whole financial future and plan into proper perspective. Saving an extra few hundred dollars a year can make a significant difference, and can make it much easier to reach your retirement goals.

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Consider the math involved. With a $3000/year savings over a 45 year period, you will need to have about 7% interest to make your $1M goal. And that is not considering taxes.

 

You will not get that with traditional savings accounts. The best way to make that sort of return will be to invest your money into accounts like IRAs or 401Ks.

 

Are you working? If so, does your employer participate in 401K? If so, I highly recommend looking into that. If not, you can still invest in IRA which has tax benefits. I would definitely consider talking to a professional if this type of retirement saving plan interests you.

 

In Canada the the RRSP is equivalent to the US IRA. I believe company pension plans in Canada are the equivalent of a US 401K.

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You can walk into any bank and get setup with an RRSP and TFSA. I think the Royal Bank is the only one with a no fee TFSA (though don't quote me on that).

 

My first recommendation is to go to these links and try and figure out how the TFSA and RRSP work:

link removed

link removed

 

If it's all gobbledygook, then set up an appointment at a bank and get some advice.

 

Here's my advice: Put it all in a TFSA. It is much more flexible than an RRSP because you can make tax free withdrawals at any time. Of course, if you don't have financial discipline then having easy access to your funds in a TFSA may be a bad thing. The only downside is you do not get a tax deduction, but depending on your current income and tax rate that may not mean much. Since you're young, it may be worth deferring RRSP contributions until you're in a higher tax bracket and will get more benefit from an RRSP contribution.

 

I highly recommend you read up on the types of assets you can hold in a TFSA or RRSP. If you step into a bank they will most likely try and get you into a mutual fund of some kind. I think this is a horrible option for someone like you, that is, someone young and interested in their financial future. You can hold, cash, stocks, GIC's, bonds, mutual funds ... there are a lot of options. Figure out what works for you and don't just blindly do what is recommended, that goes for my advice as well.

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If you are younger and don't have a large income, then go for the TFSA.

 

The only advantage of RRSP is income tax reduction, but if you don't make that much income to start with, then you may get only a very little deduction, which will be completely offset by the tax you pay when you withdrawl the money later.

 

Also, the money you contribute now will probably be the money that will grow the most. Therefore, you want to keep as much of that money tax free for when you need it as possible.

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You can walk into any bank and get setup with an RRSP and TFSA. I think the Royal Bank is the only one with a no fee TFSA (though don't quote me on that).

 

I'll quote you on that one as being incorrect

 

You have received some good advice - what it really boils down to is your financial plan. Are you looking to do a longer term investment? The immediate tax benefits come from the RRSP, but as people have mentioned you pay the withholding taxes when you withdraw from it. The idea is that when you retire your income bracket will be lower than your current bracket therefore you will be paying "less" taxes while immediately receiving the tax benefits now. The TFSA has the immediate benefit of flexibility, the money can be removed at anytime without penalty but only the interest is a non-taxable benefit.

 

If you are looking for a long-term investment with a higher rate, you can pick up registered "guaranteed investment certificate" they often have a higher interest rate, but you are essentially locking your money away for a set period of time. Being that you are only 20 and have no immediate need of this money, you could safely secure some of the money in these investments without worry. Then again, with an RRSP your money is essentially "locked away" anyways (if you don't want to pay immediate taxes). Some banks also offer programs like this and mutual funds through the TFSA as well.

 

Your RRSP contribution cap is determined by your income and your TFSA cap is $5000 each year (going forward as of 2009). Personally, I took the "split" route. I put half of my money in my RRSP and half into my TFSA. I plan on putting my tax return back into my TFSA since interest rates at my bank are equal on both accounts.

 

Good on you for starting to save early. You may not make the million dollar goal on investments alone, but starting early will give you something in the long run.

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