Savings Savvy: Know your savings vehicles

Class introduction

When talking about savings, understanding form and content is quite important. It allows us to distinguish savings vehicles from savings products.

Today, we'll be looking at two very popular savings vehicles, the RRSP and the TFSA.

Savings vehicles and products

When talking about saving vehicles, we are referring to a series of acronyms such as RRSPs, TFSAs, RRIFs and RESPs, to name a few.

On the other hand, savings products refer to what is implemented in the savings vehicles to help money grow. Namely, stock market shares, bonds or even shares of workers' funds. Like the ones with the Fonds de solidarité FTQ. To help you understand, let's imagine a reusable container. This is the TFSA. It's the container in which you will deposit your savings products.

When you invest, you must select the combination of several products and vehicles that will better serve your specific objectives.

As long as you don't have savings products in your container, you won't be able to generate investment income. Therefore, savings products are what can allow you to grow your capital.

And like me, you probably know that reusable containers come in many different formats to meet different needs. The same goes for savings vehicles. Choosing the right vehicle will depend on a combination of factors such as your family situation, your salary, and your goals.

Benefits of RRSPs

RRSP stands for Registered Retirement Savings Plan. It's a vehicle that encourages saving (drum roll) for retirement.

You can also contribute to an RRSP to undertake other major projects such as buying a house with the Home Buyers' Plan (HBP) or going back to school with the Lifelong Learning Plan (LLP). These plans allow you to temporarily withdraw an amount from your RRSP without any tax incidence. However, you will have to repay the amount according to each plan's terms.

The RRSP offers several fiscal advantages including tax deferral.

Your contributions are tax deductible, which allows you to reduce the amount of tax you pay today. Once you withdraw them, the amount will be added to your income for that year. Therefore, your goal is to have a lower tax rate when you withdraw.

As a general rule, you can contribute up to 18% of your last year's annual salary to an RRSP. And the beauty of it is that all your unused contribution room from the past years accumulates, meaning the amounts you were entitled to deposit but didn't will all add up.

TFSAs: the best friend to all fluctuating projects

TFSA stands for Tax-Free Savings Account.

As the name suggests, the income earned on your TFSA investments is not taxed when you withdraw it. But unlike an RRSP, your contributions are not tax deductible.

The TFSA is a flexible savings vehicle that allows you to access your money at any time, without the same tax consequences as an RRSP.

A TFSA's flexibility also implies that it can be adapted to any of your projects. You can use your TFSA to save up for all your wildest projects, like life insurance. But that's just me. It could also be for a trip or an electric car.

The TFSA contribution limit is determined by the Canada Revenue Agency each year. And like an RRSP, your unused contribution room accumulates over the years.

Class recap

Alright, I know this must be a lot of new information for you.

In summary, RRSPs and TFSAs have some things in common. The most important thing for you is that they both allow you to make tax-sheltered investments.

But there are several things that set them apart. Like the impact on your tax bill when making contributions and withdrawals, and the desired flexibility to support the mountain of projects you wish to undertake. And that's what's going to determine what's the best choice for you.

If you've now become an expert in all things related to reusable containers, I've done my job right.

In the next class, we'll take a look at the products to put in your savings vehicles. And most importantly, how to choose said products.