Saving for retirement isn’t just a goal, it’s a lifelong responsibility. The sooner you start saving for the future, the more you will get to enjoy when you finally decide to retire. There are a few different ways people can save for their retirement, but the most common methods include saving in a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA).
However, just because you’re saving your money in these accounts doesn’t necessarily mean you have free rein over how and when you can use that money. There are a number of different rules and conditions you need to follow when you open these accounts, especially if you plan on transferring funds from one account to another.
Today, we’ll look at how these accounts work and what you can expect if you plan on saving, withdrawing, or transferring funds between the two..
Of course, having a financial advisor you can trust can ease the process and help you avoid unexpected fees and taxes. If you’re wondering how you can get your money working for you, speak with the team at DeHaan Private Wealth and hear from financial experts who have your best interests in mind.
Contact us and we’ll be happy to walk you through each account, along with their pros and cons.
What Are RRSPs & TFSAs?
Before we look at how transferring funds between your accounts can affect you and your money, let’s spend a few minutes going over these saving plans and how they are designed to help you achieve your financial goals.
RRSP (Registered Retirement Saving Plans)
First up is the registered retirement savings plan, more commonly known as an RRSP. RRSPs are generally the standard retirement savings account Canadians have, and are often used to support your lifestyle after you turn a certain age.
You can contribute up to 18% of your total income from your previous tax year’s salary, but your contributions might also be limited by the year. For example:
In 2020, you were allowed to contribute $27,230
In 2021, you were allowed to contribute $27,830
In 2022, you were allowed to contribute $29,210
In 2023, you will be allowed to contribute $30,780
Your bank will then grow your RRSP through investments, and all the money you make inside this account will accumulate tax-free, and contributing to your RRSP could help reduce the taxes you pay over the year—that is, until you withdraw from the account.
Withdrawing money from your RRSP counts as yearly income, and it will be taxed as such. For example, if you make $50,000 a year and pull out $10,000 from your RRSP account, you will be taxed as if you made $60,000 for that year. However, you will not be able to withdraw money from your account if you have a locked-in RRSP.
After you turn 71, though, your RRSP will then be given to you in a few different ways: a lump sum, a registered retirement income fund, or as an annuity you can purchase.
TFSA (Tax-Free Savings Accounts)
Tax-free savings accounts, or TFSAs, are relatively new, but have numerous advantages for helping people save their money over a long period of time.
What makes this account unique is that you do not need to pay taxes on any amount put into the account, and you can withdraw as much money as you’d like tax-free. While some people may use a TFSA to help fund their retirement, many people can use their TFSA to fund:
A home purchase
Buying a car
A vacation
There are contribution limits to a TFSA and they can change from year to year. Currently, the TFSA contribution limit is set at $6,000 for the year 2022. However, you can continue to grow your account in the following year.
So, Can I Transfer Funds from My RRSP to My TFSA?
Put simply, you can technically transfer funds from your RRSP to your TFSA account, but you’ll have to be ready to pay any applicable taxes that come with pulling money out of your RRSP. Once you pay the taxes on your RRSP, you are then free to move that money wherever you wish, including a TFSA account.
If you make less than the basic personal amount of income, which is $14,398 if your net income is below $155,625 for the year, then you can pull up to $14,398 from your RRSP without having to pay federal taxes. However, keep in mind that the provincial personal amount in Alberta is $19,369, and there may be some provincial taxes that you might need to pay.
On the other hand, moving funds from a TFSA to an RRSP is much easier and does not trigger taxation. Simply pull the money from your TFSA and transfer it to your RRSP, so long as you’re within your contribution limit for that year.
However, before you make large financial decisions, it’s important to speak to your financial advisor first. They could recommend a strategy to help minimize the taxes you pay and maximize your potential earnings from your various accounts and investments.
Should I Be Saving Money in Both?
In most cases, it’s smart to save some money in both accounts. However, this ultimately depends on your saving strategy and your financial goals going into the future.
Are you planning on traveling the world? Are you and your partner thinking about having children? Do you plan on working until your retirement age, or would you rather retire early? These are the questions your financial advisor will be asking you when you visit them for an appointment, and the advice they provide could help you achieve the financial freedom you’ve always wanted.
If you’re interested in seeing what financial freedom can look like in your future, call the team at DeHaan Private Wealth today. We’ll be happy to walk you through a few of our tried-and-true strategies so you can worry less about money and spend more time focusing on what you love most.