I've written a fair bit about the importance of saving for retirement and specifically on both the topic of Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs). Now, I'm focused on sharing the differences between RRSPs and TFSAs.
Like supportive teammates on a winning sport's team, both savings vehicles make for great contribution methods. Depending on the individual's specific needs, income level, and stage of life, one may be a better option than the other. It really depends.
Many Canadians are familiar with RRSPs as they have been around 1957. TFSAs are the new kid on the block. They've only been on the scene since the 2008 Federal Budget. As the new player, they are not as top of mind as RRSPs tend to be.
Ideally, if you've met with a trusted financial advisor, you will be encouraged to invest in both an RRSP and a TFSA. Not many folks have extra cash hanging around, but with some smart savings goals or when the occasional windfall happens, it is helpful to understand the differences as well as pros and cons of these two heavy savings hitters.
When it comes to RRSP contributions, the limits continue to increase on an annual basis. In 2015, the allowable contribution is 18% of your earned income from the previous year to a maximum of $24,270 for 2014, $24,930 for 2015 and $25,370 for 2016. The allowable contribution is deducted from the gross taxable income for the year, which may lead to a nice tax refund that could potentially be put into a TFSA. RRSPs create a tax deferral. Basically, the payment of income tax is shifted until retirement when forced annual withdrawal amounts are required after age 71.
Turning our attention to the TFSA, it can be described as an all-purpose savings vehicle that can be used for any savings goal. Canadians are able to invest up to $5,500 annually and may carry-forward any unused contribution room. Investment growth that happens in the TFSA is tax sheltered whereas the annual contributions are not.
A helpful feature of the TFSA is that withdrawals don't incur tax and the full amount of a withdrawal can be resubmitted into the TFSA in future years. In addition, TFSA amounts don't affect the eligibility of federal income-tested benefits like Old Age Security. When the saver turns 71, he isn't required to withdraw any money from the TFSA. This becomes an attractive savings option for seniors.
Whether you're looking for help with understanding RRSPs or TFSA or another retirement savings vehicle, our team is well positioned to address your questions. We can show you how to maximize your plan member's savings opportunities and mitigate the risk of unwanted financial surprises such as unexpected tax deductions. Contact us. We're here to help so you can focus on what you do best.
On May 13, the Minister of Health, the Honourable Rona Ambrose, along with the Minister of State for Social Development, the Honourable Candice Bergen, highlighted the increased support proposed from Canadians taking care of family members facing a significant risk of death.
Effective January 3, 2015, the Government of Canada plans to enhance Compassionate Care benefits as part of Canada's Economic Action Plan 2015. They will pump an additional $37 million annually to extend Employment Insurance (EI) compassionate care benefits from 6 weeks to 6 months.
These benefits are available to eligible individuals who are temporarily away from work to care for a sick family member with a significant risk of death. It is estimated that 6,900 claimants will make use of this benefit per year.
The plan for these enhanced benefits creates an scenario where the claimant may be eligible to collect up to 26 weeks of benefits. In addition, these benefits can be taken within an expanded period of 52 weeks (up from 26 weeks) and can be shared between family members.
There are no changes to the eligibility criteria for pending claimants -- a medical certificate signed by a doctor attesting to the family member's condition is still required.
If registered for access to the EI program, self-employed Canadians can apply for EI special benefits (maternity, parental, sickness, compassionate care and parents of critically ill children benefits).
Did you know?
Caregivers of those who are at risk of death or who are dying go through a difficult time. The demands of the gravely ill may affect the emotional and financial security of caregivers as well. It is during these times that benefits such as compassionate care are so necessary and valued. For many, they don't anticipate they will see themselves in a position of this nature -- whether with a serious health risk or as a caregiver. Our role is to help address uncertainty and manage risk during the financial aspects of the group benefits experience. We also make it our business to stay on top of legislative and regulatory changes so that we are well positioned to support your needs. We're here to help and invite you to contact us so that you can stay focused on what you do best.
What will you be doing this summer?
Recently, I read that Finance Minister Joe Oliver intends to consult experts and stakeholders regarding ways to explore giving people options to boost the Canada Pension Plan (CPP) during the summer of 2015. The issue of enhancements to CPP has been a topic of much debate in recent years as the various political parties wrestle with the best approach for Canadians.
Now, Prime Minister Harper wishes to consider giving us the option of hiking CPP contributions as a way to boost our retirement savings through voluntary add-ons. In the past, it has been the New Democratic Party (NDP) and the Liberals who have waved the flag regarding the need to enhance CPP.
While this debate rages on at a federal level, the necessity of change and helping Canadians save enough for retirement is felt at the provincial level as well. In Ontario, the Ontario Registered Pension Plan (ORPP) legislation was introduced earlier in 2015. I've written on this topic a number of times. See these posts for ORPP details:
The change in the Tories opinion about CPP enhancements has many Canadians and the Progressive Conservative's opponents wondering if their decision has anything to do with the upcoming election. Regardless of their motivation, all of the parties seem onside, at least fundamentally, with the need to expand this greatly valued government-sponsored retirement benefit.
Whether or not these changes will take hold is yet to be seen, but who can fault a government for wanting our retirement system to be among the best in the world?
There never seems to be a panacea to solve this important and much discussed issue, but the reality prevails that Canadians need more options to make saving for retirement as easy and painless as possible. In a world where there are too many distractions lobbying for us to spend our money, creating a nest egg that one can rely on when the time arrives can't be a bad idea.
The debate seems to explode around the concept of forcing Canadians to save. Some would say that if we don't force people to save, they won't. As of March 2015, the maximum monthly payout of CPP is $1,065.00. Will that be enough for retired Canadians to live on?
The announcement from the Harper government is relatively vague, but shows a concern for the topic in a matter that they haven't broached to this extent in the past. Whether you're in favour of boosting the CPP or not, the matter of saving for retirement continues to be a concern. Within group benefit plans, there are lots of options for voluntary contributions such as group RRSPs and TFSAs. The more informed employees are about their choices and the importance of saving, the better the experience for all. We're here to help you create these conversations and build the tools that drive awareness at all levels of your organization. Contact us to help so you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.