Save for the years ahead

Contributions to an RRSP are deducted from your taxable income, so they can lower the tax you pay this year. The money grows tax-deferred, and you pay tax when you take it out, usually in retirement, when your income is lower.

Your new room each year is 18% of the earned income you reported the year before, up to a yearly maximum, less any pension adjustment if you belong to a pension plan at work, plus any room you did not use in earlier years. Your Notice of Assessment shows your exact limit. Contributions made in the first 60 days of a year can be deducted on the previous year’s return.

By the end of the year you turn 71, an RRSP must be converted into a Registered Retirement Income Fund (RRIF) or an annuity, or cashed in.

An RESP saves for a child’s college, university or apprenticeship. The federal government adds the Canada Education Savings Grant: 20% of the first $2,500 you contribute each year, up to $500 a year and $7,200 per child over the life of the plan.

The savings grow tax-deferred. When the student takes out the grants and growth for school, they are taxed as the student’s income, which is often little or no tax. Lower-income families may also qualify for the Canada Learning Bond.

A TFSA is open to Canadian residents aged 18 or older. Contributions are not deductible, but everything the account earns grows tax-free, and you can take money out at any time without paying tax.

Each year the federal government adds new contribution room, and room you do not use carries forward. Money you take out is added back to your room on January 1 of the following year.

A TFSA can hold savings for a goal a few years away, an emergency fund, or retirement savings alongside an RRSP.

An annuity turns a lump sum of savings into regular payments that are guaranteed. A life annuity pays you for as long as you live; a term annuity pays for a set number of years.

You can buy one with money from an RRSP or RRIF, or with non-registered savings. Many retirees use an annuity to cover their fixed costs, alongside government pensions, so the essential bills are paid whatever the markets do.

Once your RRSP and TFSA room is used, a non-registered account lets you keep investing, with no contribution limit and no rules on when you take money out.

Interest is taxed each year as it is earned, even when it is paid only at maturity, while dividends and capital gains are taxed when you receive or realize them. Each is taxed differently, so where you hold each investment matters. Santhakumar can help you plan which savings go in which kind of account.