TFSA usage dips as Canadians struggle with higher inflation, economic concerns: BMO
With the deadline for contributions to a registered retirement savings plan (RRSP) approaching, experts say there are specific considerations for younger investors who are deciding where to allocate their money.
Scheherazade Hasan, senior advisor at Wealthsimple, told BNNBloomberg.ca she is fielding questions from clients about much they should contribute to their RRSP or if they should prioritize other investment accounts.
She said RRSPs are a generally good idea for young savers, even those earning under $60,000 per year.
“A rule of thumb that we tend to use is that for clients who are making over $50,000 to 55,000, and if their goal is to save up for retirement, to buy their first home, or to even go back to school, it's a good idea to consider investing in an RRSP,” Hasan said.
Julie Seberras, head of wealth planning and practice management with Manulife Wealth, said it’s important for people in their 20s to start investing.
She said younger investors have time on their side to “(ride) out the ups and downs of the markets.”
Account options for young investors
Individuals with income under the $55,000 threshold who need more flexibility may want to consider contributing to a tax-free savings account (TFSA), Hasan said.
A TFSA is a savings account where the owner can hold a variety of investments and generally pay no tax on income earned in the account, or withdrawals from it.
An RRSP is a registered investment account that allows people to save for retirement through deferring taxes on their investment gains. Income earned in an RRSP is usually tax exempt while funds are in place, but payments are taxed when money is removed.
When it comes to which investment account younger individuals should prioritize, Hasan said it depends on their goals. Their choice should account for how their income may change over time or if they qualify as a first-time homebuyer.
“The FHSA (first home savings account) is a great new account to reduce your taxes and save up tax-free. If they end up buying a home they can take the money out tax-free, otherwise it rolls into their RRSP,” Hasan said.
“For a lot of people who fall into that bucket, I recommend opening an FHSA anyway.”
The FHSA combines benefits of an RRSP and a TFSA, allowing first-time home buyers to put money toward the purchase of a home. Contributions to the account are tax-deductible and withdrawals are non-taxable.
If a younger investor has maxed out their FHSA, Hasan said she recommends prioritizing a TFSA or RRSP based on “where their income is today and where it would be down the line when they actually expect to withdraw this money.”
Seberras said younger investors may want to prioritize their TFSA over their RRSP due to the flexibility it provides.
“That TFSA has so much flexibility and I think it's going to be really ideal for a lot of people in their 20s,” she said, adding that people can start accumulating TFSA contribution room after the age of 18.
“Your RRSP savings is really going to be for retirement savings.”
Seberras said there are other factors younger investors may want to consider when choosing which account to prioritize.
There are some people who “can’t sleep at night knowing they have some debt,” she said, and it may be more important for those individuals to pay that off sooner.
However, Seberras cautioned that people with debt may want to consider the rate of return they might receive if they allocated those funds to investments rather than paying down debt.
Many younger investors appear to be unfamiliar with the spousal RRSP, Hasan said, but it can provide substantial upside for some couples.
The benefits extend to common-law spouses, she said, and the account is particularly helpful for couples with significantly different incomes where one partner is in a higher tax bracket, as it allows the higher-earning partner to contribute to their spouse's retirement.
“The higher-earning partners, they'll get the tax savings on their own income, but they'll also simultaneously boost their partner's retirement balance,” Hasan said.
“That's what will lower the couple's tax burden overall but also in retirement and they're withdrawing from those accounts.”
According to Hasan, a group RRSP is a retirement plan offered by some employers who typically take a portion of an employee's paycheck and allocate it to a group RRSP.
Some employers also offer matching programs where employers match contributions into the group RRSP up to a certain level, she added.
“What I often tell my clients is that if your workplace does offer this group RRSP plan that you should absolutely take advantage of,” Hasan said.
“If they're offering that contribution matching, it's a great idea to contribute the maximum that you need to get the full match. At the end of the day, it's part of an employee's compensation.”