George from Thornbury asks: I make $95,000 a year and have $25,000 right now in a high interest savings account at 5%; is this my best option? I haven’t put any money in my RRSP or TFSA for this year. Should I consider that instead to help lower my taxes in 2024?
Hi George,
It’s great to see you’ve been able to stash away a nice little nest egg. Typically a non-registered account is the least beneficial account type because there are no tax benefits. The first step would be making sure you have money set aside for emergencies and opportunities. There are lots of rules of thumb as to how much this should be: such as 10% of your investments, 3 months salary or at least $10,000. Everyone’s comfort level with savings is different and these should be used as a general guide.
Utilizing a Tax Free Savings Account (TFSA) would be a great way to generate interest tax free. The money could also be withdrawn from a TFSA tax free, so it makes sense to utilize these benefits over a taxable non-registered account. A common misconception is that a TFSA has to be a savings account, which is understandable — it’s right in the name. However, you could have other investments such as GICs, stocks, bonds, mutual funds or ETFs or a mix of all of the above. Whichever option you choose, it should match the goal and purpose of the investment.
Based on your taxable income, setting up a Registered Retirement Savings Plan (RRSP) would help reduce your taxes owing and likely generate a tax refund. Our tax system places income in different brackets with higher tax rates as you climb up the brackets. In other words, the higher your income, the more benefit an RRSP would provide. However, unless you are withdrawing funds for a home or returning to school, accessing funds from an RRSP come with tax implications as the gross withdrawal amount is added to your taxable income.
New as of April 2023 is the First Home Savings Account, (FHSA) which can be utilized by individuals looking to save for a home. Deposits provide a tax deduction similar to an RRSP, and can be withdrawn tax free for an eligible home purchase. Since funds can be transferred to and from an RRSP, this registration type will likely become far more popular with Canadians that don’t own a home.
There are other registration options such as a Registered Disability Savings Plan (RDSP) and Registered Education Savings Plan (RESP) which also have pros and cons. Navigating all of these decisions and priorities can be complicated, which is why it’s important to work with a financial advisor who takes the time to understand your goals and financial picture.
