Jargon-free finance
RSPs, TFSAs, GICs .... SOS! There are a lot of acronyms in finance, and just as many options to grow your money. So how can you figure out which path is best for you?
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TFSA
Click on each acronym to read its definition.
Let's start by clearing up two important terms
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Tax-Free Savings Account: Your money grows tax-free, and withdrawals are also not taxed. Use it for pretty much any short-term or long-term goals.
Retirement Savings Plan: Set aside money for your retirement. Your contributions can be deducted from your taxable income, and your money is only taxed when you withdraw it.
RSP
A TFSA is a tax-efficient way for Laura to save for her holiday and a GIC offers her a guaranteed short-term return. After a year, her deposit would grow to $3,150, tax-free.
Now let's walk through a few scenarios to see how each of these accounts can be used in different ways.
Laura's big trip to Europe is over a year away but she's planning ahead. She has $3,000 saved up in her chequing account. What should she do with it?
Put the $3,000 in her RSP.
Put the $3,000 in a TFSA, which gives Laura some options. She thinks a 5.0% one-year GIC would be good timing for her trip.
Scenario 1 of 4
Next Scenario
Good choice!
An RSP is an important tool to build a retirement nest egg, but isn't a great way for Laura to save for a trip. Why? Because any withdrawals from her RSP would be taxable.
Not quite...
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In a TFSA, any growth will be tax-free. Milo can examine what type of savings or investment option best suits him in this account. He can even have multiple TFSA accounts, with one designated as an emergency fund.
Milo got an inheritance of $14,000. He has no debts, but also has nothing saved for retirement, nor an emergency fund. What are his options?
Use it to open an RSP.
Put it in a TFSA.
Scenario 2 of 4
This is a good choice for Milo
Money he contributes to an RSP can reduce his taxable income, and grow to help fund his retirement.
Both A and B. Put some of his inheritance in a TFSA and the rest in an RSP.
He can get the tax benefits of both types of accounts and build an emergency fund while also setting aside money for his retirement.
This is the best choice for Milo
Retiring takes careful planning and discipline. To maximize his contribution room, Ahmet should consider setting up regular, automatic contributions to his RSP.
Ahmet is 25 years old and wants to start planning for retirement. What could he do?
Open a TFSA and try to max out his contribution room every year.
Open an RSP and try to max out his contribution room every year.
Scenario 3 of 4
Good plan!
A TFSA can be a good choice for retirement if Ahmet's income isn't currently very high, so getting a tax deduction from an RSP is a low priority.
Good idea!
Put some money into an RSP, some into a TFSA, and grow both accounts with regular automatic contributions.
Ahmet gets started early on saving for retirement, and both an RSP and a TFSA can help him get there.
Great idea!
An RSP is important for retirement savings, but money withdrawn for the renovation would be taxed. So this wouldn't be a good account to use for a home reno.
Griffin and Siobhan just bought their first home and are planning on a reno down the road. What are their options?
They already have money stashed in their TFSAs, so they can take some out to help fund their reno dreams.
They already have money stashed in their RSPs, so they can take some out to help fund their reno dreams.
Scenario 4 of 4
A TFSA can be used for any goal, and funds withdrawn aren't taxed. This flexibility makes it a good spot to set aside money for a home reno. Note: A TFSA can’t be a joint account, so each partner could set up their own TFSA contributions.
Estimating retirement expenses
How to build an emergency fund during a time of high inflation
Power up your investments with automatic contributions
A beginner’s guide to GICs
We hope you found these scenarios helpful. Now it’s time for you to choose your own adventure. Click here to find out how we can help you reach your own goals.
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