**This is a sponsored post written by me on behalf of BMO. All opinions are my own.
Every year, you have until the 60th day of the year to make a Registered Retirement Savings Plan (RRSP) contribution. In other words, if you want to claim that contribution to your previous year’s tax return, you better make a deposit by March 1st.
This is nothing new as it’s the same deadline every year, yet people always freak out since they haven’t made a deposit to their RRSP yet. I certainly understand wanting to reduce your income by making an RRSP contribution, but your RRSP is a year-round thing. Plus, there’s also your Tax-Free Savings Account (TFSA) that you need to consider which is another useful savings vehicle that you have at your disposal.
If you’re all worked up about a so-called deadline, there’s a good chance you may not quite understand how RRSPs and TFSAs work. Instead of rushing out to make a deposit, you may be better off taking the time to educate yourself about how they work.
Getting to know your RRSP
RRSPs can be a bit complicated so here are a few quick facts that you need to know about them.
- If you’re under the age of 69 and have filed your taxes, you’ll have contribution room
- Your contribution limit is based on 18% of your income from the previous year
- Contributions made are tax deductible
- Any gains made are only taxed when you withdraw your money
- Any unused contribution room carries over to the next year
- You can invest in a variety of investments within your RRSP such as ETFs, mutual funds, stocks, bonds, etc.
- RRSPs are great for people who want to reduce their income
The above is obviously a very quick look at how RRSPs work, but have you ever wondered what Canadians are doing with their RRSPs? According to a recent study from BMO, the average amount in RRSP plans has increased from $$83,635 in 2016 to $101,155 in 2018. Younger people may think that’s an insane amount, but keep in mind this is just an average. That being said, Canadian Millennials increased the amount in their RRSP from $$15,377 in 2016 to $28,821 in 2018 which is rather encouraging.
I love how Canadians have increased their RRSP contributions over a two-year period, but I want to mention that just making a deposit isn’t good enough. You need to invest your money so it actually grows. Think about it, if you just put your money in a savings account within your RRSP, you would actually end up losing money due to inflation.
Of course, investing can be a bit intimidating at the start which is why BMO has financial planners, investment advisors and online investment options available to help develop a plan that will best achieve your future goals – including retirement.
How your TFSA can work for you
Back in 2009, Tax-Free Savings Accounts were introduced and it’s arguably the best gift Canadians ever received from the government. Even though this account has some amazing benefits, many people are still confused about how it works, so let’s go over some basics.
- Contributions are not tax deductible
- All capital gains are tax-free
- You can invest in a variety of investments within your TFSA such as ETFs, mutual funds, stocks, bonds, etc.
- TFSAs are good for people who are in a low tax bracket and don’t need the refund provided by RRSP contributions
- TFSAs are also great for people who have maxed out their RRSPs
- Any unused contribution room carries over to the next year
- Any withdrawals made can be contributed back at the beginning of the following year
As you can see, TFSAs were sort of designed to address the flaws of RRSPs. In my opinion, they’re more flexible compared to RRSPs, but they’re really meant to complement each other. Ideally, you’ll use both throughout your working and retirement years.
Similar to RRSPs, TFSAs have seen growth in the last year with 69% of Canadians reporting that have a TFSA (up 23% from 2017) according to a recent BMO study. 54% also said they preferred their TFSA over their RRSP.
The study also found that the general knowledge about TFSAs has increased by 9% since 2014, but less than half of Canadians (49%) aren’t aware there are age restrictions on TFSA accounts. If Canadians aren’t even aware of the age restrictions, imagine their confusion when it comes to contributions and withdrawals.
The good news is that Canadians are using their TFSAs for some pretty good reasons. 50% of those surveyed said they’re using it for their retirement fund, 39% as their emergency fund, and 26% for savings for major purchase other than a home.
Getting your RRSP and TFSA set up
Now that you understand how RRSP and TFSAs work as well as how Canadians are using them, it’s time to get your accounts set up.
As mentioned, BMO has financial advisors and investment advisors available in-branch and over the phone; however, if you prefer to invest online, options available to you include SmartFolio where your account will be professionally managed online; BMO InvestorLine Self-Directed which will appeal to those who want complete control over their own investments and BMO adviceDirect, which combines DIY investing with personalized recommendations and support.
The digital options are great since you can do everything online with access to investment representatives and you won’t be paying much in fees. However, If you’re looking for an expert to help you set goals, provide personalized guidance and advice, and help build a long-term plan, seeing an investment professional in-person might be a good start for you.
Remember, if you’re going to work with an investment professional, be sure to ask a lot of questions, so you understand how your money is being invested. The more you know about your money, the better you’ll be since you’ll understand how the markets work and how your money is being invested.
The RRSP deadline gets a lot of play at this time of the year, but there’s really no need to panic. BMO has several offers available that you can take advantage of before the March 1st deadline. If you open up an RRSP, TFSA or both and then set up automatic monthly contributions, then you’ll always be paying yourself first. Reviewing your portfolio is important, but there’s no need to obsess over it. Check on the progress once or twice a year and speak to your advisor (if you have one) if you have any concerns.