01 Mar 2013

It’s deadline day for RRSPs.

What does that even mean?

An RRSP is a retirement savings plan, registered with the Government of Canada and to which you and your spouse or common-law partner may contribute. As long as you keep the funds in your plan, the income you earn on your investment is tax-exempt, until you receive payments from it.

And any contributions up to midnight tonight are deductible for your 2012 tax return.

A Bank of Montreal survey, revealed in today’s Calgary Herald, shows almost two-thirds of Canadians have made or plan to make a contribution to their RRSP by tonight.

“The survey found that a sense of responsibility was the top motivator for make a contribution this year to a Registered Retirement Savings Plan, with 51 per cent saying it was the right thing to do,” the story reads.

Chris Buttigieg, senior manager of wealth planning strategy at BMP Financial Group, told the Herald that Canadians are realizing they have to take the responsibility for their financial security throughout retirement.

After all, he said, only one in three Canadians have an employer pension plan.

Now you’re thinking “augh, I don’t have time to get around to this” but you still want to start building your little next egg for retirement.

A few years ago, the Government of Canada introduced a Tax-Free Savings Account (TFSA), which is a flexible, registered, general-purpose savings vehicle. The TFSA is intended to allow Canadians to earn tax-free investment income to meet lifetime savings needs.

It has some very key differences from an RRSP. Your contributions are not deductible for tax purposes and withdrawals of either contributions or earnings are not taxable.

Here are the basics:

  • Canadian residents, ages 18 and older, can contribute up to $5,500 annually to a TFSA.
  • Your unused TFSA contribution is carried forward and accumulates in future years.
  • You can choose from a wide-range of investment options, such as mutual funds, Guaranteed Investment Certificates and bonds.
  • You can replace any funds withdrawn in future years, although re-contributing in the same year may result in an over-contribution that would be subject to a penalty tax.
  • Funds can be given to a spouse or common-law partner to invest in their TFSA.
  • You can transfer your TFSA funds to a spouse or common-law death when you die.

The big question is: which one do you choose, an RRSP or a TFSA?

If you have enough money, you may want to split your investment funds between the two options. They tend to complement each other since the RRSP is ideal for long-term investment, while the TFSA is better on the short-term if you intend to make withdrawals.

You could even use the TFSA to save for your RRSP contributions.

Your best option is to talk with a financial planner to determine a course of action for your retirement savings.

Let us help

A1 Accounting can advise you on your financial planning. Fill out our contact form or give us a call at 403-226-8297.