Have you Maximized your Tax Savings?

By Diana Gray

At our recent Lunch ‘n Learn session, Paul Heinrichs, Investment Specialist at Vancity Life Insurance Services, presented a very interesting and informative session on RRSPs vs TFSAs. He clarified the differences between the two and gave numerous examples of when one method would be preferred over the other.

RRSPs – save tax now; pay it later plan:

With RRSPs you get to save tax now on the income earned by putting that amount into a Registered Retirement Savings Plan. When you take the money out, you pay tax on it in that year. The intent of the program is to help people to save for their own retirement. When they take out the money in their retirement years, presumably they will be in a lower tax bracket, therefore the amount of tax due on withdrawing the money will be at the lower tax rate.

While RRSPs have been a tax-saving option for many years, Paul shed new light on how best to use and maximize this tax deduction. For instance, he suggested you should look at (a) your tax bracket based on your earnings and (b) the amount of RRSP deduction you are allowed for the current year, and just use the portion of your allowable deduction that would bring you into a lower tax bracket. Any residual amounts can be carried forward to another year when you may need a larger RRSP amount to bring you to the lower tax bracket.

While the opportunity to purchase an RRSP for the 2011 tax year has passed, it is not too late to start contributing to an RRSP for the 2012 tax year. Most people find it is easier to make monthly installments for an RRSP rather than coming up with a large sum just prior to the end of February annual contribution deadline.

TFSAs – pay tax now; save tax later plan:

With a Tax-Free Savings Account, the government allows you to earn money on your investment savings without any taxes on the earnings. To receive maximum benefit from this plan, you should use this for long-term savings at the highest rate of interest. You can contribute to a TFSA up to $5000 per year since the plan started in 2009. Therefore if you have not yet started a TFSA, you can move any investments into your TFSA up to $20,000.

Different from RRSPs, if you need to withdraw from your TFSA to satisfy an “emergent” need for money, you can replace those amounts to top-up your TFSA in later years when funds are more available. The intent of both programs is to encourage long-term savings to help Canadians save for their own retirement years.

The underlying message in Paul’s presentation is the value of speaking with an investment advisor as everyone’s personal financial situation is different. There is no one set of guidelines that applies to everyone. He said to get started, you need to assess your monthly expenses and project your short- and long-term goals such as vacations, vehicle purchase, house purchase and upgrades, savings, age you wish to retire, etc. He offered the following link as a useful tool to prepare you for sitting down with an advisor www.vancity.com/Planning/Calculators. He recommended that your financial goals be revisited every year and your investment plan adjusted accordingly to make sure you are taking full advantage of the tax savings available to you.

Paul finished by reiterating the message that whatever you do, it is critical that you SAVE something — anything — and make a habit of it. He sadly reported that many people are going into retirement with a huge debt-load and minimal finances available, so will be living close to the poverty line. This situation is totally avoidable if you start saving as early as possible.

For those who were unable to attend or wish a copy of his slide presentation, Paul can be reached at:  604-877-2636 or paul_heinrichs@vancity.com. Also Michael Sanders, Vancity Branch Manager at the Telus building location, offered his time to respond to any enquiries:  604-877-2630.