Retirement planning using RRSP and TFSA

BY: FAZAAD BACCHUS 

Over the month of February, there was a buzz and frenzy as clients rushed to get in their RRSP contributions to minimize or reduce their 2018 tax payable. That deadline was on March 1^st  as it is every single year but some have missed it. Any contributions you make from now on will go towards your 2019 tax year. For those who contributed, I hope that you have put the money in well-chosen funds so that your money could grow in a safe manner.

Of course, I am sure you know that you can save in your RRSP by paying an amount every month, where you don’t have to worry about a lump sum come February next year, it’s only if you want to top up then you may need to do so. But here is something I would like you to consider, is there such a thing as saving too much in your RRSP? This is a question not often asked, but it’s one to consider, as it is possible that a person could be saving too much in RRSP.

Take for example an individual who has amassed a significant of money in RRSP already. If that person continues to save even more, then by the time they become age 71 and have to transfer the RRSP into an RRIF the income from the RRIF is likely to be very high. Let’s couple that with any CPP and pension benefits they may be receiving and suddenly we might be looking at a clawback of OAS benefits. Of course, any GIS benefits would have already been taken back. All of this is happening because there is just too much money in the RRSP account.

This brings us now to whether we should be saving still for RRSP during the year or should we focus on the TFSA. As I have written before many times over, the TFSA (tax-free savings account) does not reduce your income tax but allows your money to grow tax-free. It is the only instrument in Canada where money can grow, and you don’t have to pay tax on the growth. It first started in 2009 with $5,000 dollars as a maximum contribution and has changed over the years to where it is now $6,000 for 2019. The total room you have, providing you were age 18 in 2009 is $63,500.

This is an immense opportunity if you have maxed out your RRSP or feel that you have saved sufficiently in it. A TFSA can be invested in identical portfolios as would an RRSP so the returns on your investment need not be different also. Upon retirement, income from your TFSA does not reduce your government benefits so that your OAS and even your GIS might remain intact.

However, to know how much you should invest in your RRSP or in the TFSA, it requires that you sit down and do some retirement planning. There are really two phases that you should be planning; one is the accumulation phase and the other being the de-accumulation phase. It is important to sit and ask your advisor to prepare a retirement forecast so that you can make sure you don’t lose out on your benefits.