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Should You Put Your Money In An RRSP Or A TFSA?

TFSA-RRSP---Blog

With RRSP season upon us, many investors are trying to decide whether they should be putting money into their RRSP. Over the past few weeks, several have asked me whether RRSP investments make sense or should they consider depositing money into a tax free savings account instead. There are a large number of investors today that don't know the difference between the two, and this has caused some confusion.

RRSP

The amount of contribution a person can make to an RRSP depends on that person's income from the previous year, with 2014's maximum set at $24,270. The amount an individual contributes to an RRSP can be deducted for income tax purposes. In my opinion, this is a huge benefit and one of just a few investments that government allows you to deduct from your income tax. When a person decides to withdraw money from their RRSP, the amount withdrawn gets added to that person's income in the year the money is taken out as taxable income. All the growth on investments made inside the RRSP compound tax free.

TFSA

Tax Free Savings Accounts (TFSA), in my opinion, have been labelled incorrectly. I would call this type of an account a Tax Free Investment Account not "savings account." Many people have communicated to me over years that they were unaware they could invest their TFSA money. Thus, they have just kept their dollars sitting in cash while earning very little interest. I believe, depending on what you are investing for, individuals should be investing their Tax Free Account dollars into something that will earn more than just one or two per cent. Like RRSP's, all growth inside Tax Free Savings Accounts is not taxable. Money is able to compound over time tax free.
However unlike RRSP's, when an investor pulls money out of their TFSA, they do not have to pay any taxes at that time. Contributions into a TFSA are not tax deductible. There is a $5,500 per year limit for all eligible individuals and if you don't use up that room each year, it can get carried forward to subsequent years. Thus today, with TFSA's being introduced in 2009, investors can contribute up to $36,500 for the life of the plan.

Long Term / Immediate

I believe there are a few reasons to own one account over the other. I consider Tax Free Savings Accounts for more immediate money as well as long term money. If an investor requires the money they are investing within the next few years, then TFSAs make more sense. RRSPs are longer term investment vehicles to help individuals save for their retirement. They are not meant to be used as a source of cash on short notice. As well, if you are a person with a small tax bill each year, then RRSP's may not make sense for you, as you will not need the tax break your RRSP contribution provides. Instead, you should consider the Tax Free Savings Account for your investment dollars. You can remove your money at any time without tax implications and money with still grow tax sheltered.

In an ideal situation, if an investor can do both, that would be the best scenario. Maximizing their RRSP contributions and Tax Free Savings Account contributions would be the best way to go. Now that the Tax Free Savings Account is in its seventh year, it has now, in my opinion, become a viable option for investor dollars as each person can now contribute up to $36,500 in total if they have not contributed before. A large enough amount to be worthwhile for many investors. I recommend each investor consult their Investment Advisor to see which type of account is better for your situation.

Hunting For Value In Energy, Financials, & Tech

BNN-February6

February 6 on BNN's Business Day AM with Frances Horodelski, we discussed how investors can strategize their portfolios in a low oil environment.  Key areas discussed included:  growth in full time jobs, low Canadian dollar, opportunities outside of Canada still important, and opportunities in the manufacturing and tech sectors.  See the full video on BNN here.

Don’t Put All Your Investment Eggs In the Real Estate Basket

The Market Volatility Continues

The last hour of every trading day lately seems to provide investors with that roller coaster feeling. With each hour of every day, the market seems to take on a new identity. Depending on who said what or what the rumour du jour seems to be, the stock market can move triple digits either way! What do investors think and how is the volatility driving their investment decisions?

The longer this volatility lasts, the more investors seem to be shying away from investing. The stock market collapse during the recession of 2008 was much harsher than any of the more recent setbacks, however, investors are remembering their experiences from that year and recent volatility is making them reluctant to be investing their hard-earned dollars today. The fear for some individuals is that the North American markets could return to a recession once again, and that fear is driving investors' decisions.

Paying Down Mortgages Instead Of Investing

In conversations with investors, I find more and more of them paying down their mortgage or other debts instead of investing, even though it is costing them very little interest to carry their debts. By paying down the mortgage rather than investing in the stock market, individuals are saying they cannot make more in equities than the interest rate they are borrowing at, and believe real estate is a better choice.

In my opinion, investors' decisions are being clouded by their negative experiences with volatility in their investments. While the market at times can take on a negative tone, investing in equities (which includes real estate investment trusts) is still the best way to grow wealth over time.

Individuals should have balance in their portfolios - real estate as part of a diversified portfolio makes sense, but investors shouldn't be sinking all their disposal income into their mortgages, especially if their interest rate is very low.

The real estate market in Toronto and across Canada is coming off its highs and slowing down, while the country's stock market has continued to perform well and I believe still has room to grow. Why would an investor put all his or her money in real estate at this time?

It makes more sense to use the low interest rate environment to create a balanced portfolio and invest in large Canadian or U.S. equities paying good dividends to compliment investing in your home. If real estate prices should take a turn for the worst, investors will have their investments to fall back on, or vice versa.

When it comes to people's homes they seem to forget the phrase, never put all your eggs in one basket.

Qualities Of A Good Advisor

The Canadian and U.S. markets continue to be as volatile as they ever have been. Whether it is geopolitical tensions between Russia and Ukraine, terrorist activities around the world, or the price of oil and commodities falling sharply, the current volatility is here to stay!

As an investor, with market volatility as high as it is, whom can you turn to, to help you invest your hard earned money? It is in times like this, where investors really need the help of a professional Investment Advisor to guide them through the ups and downs of the market. The most important question is, how do you know that your current advisor is doing a good job and that you have the right person to advise you?

The Qualities

The number one quality of an exceptional investment advisor is that they consider the needs of their client ahead of their own. Do you trust your investment advisor? Your advisor should not be worried about how they will get paid but instead are concerned about how their client's goals and objectives will be met.

Some investors have it incorrect in that they look at the letters behind an advisors name or how big their business may be to figure out if they are good at what they do. Although education and size of business are important, they are not as important as finding the right person that will watch out for your best interests ahead of everything else.

You want to work with an advisor that follows and understands the markets. You don't want someone that passes off the responsibility of your account to someone else (i.e. mutual fund or third party manager). Your advisor should understand what is happening on Bay and Wall Streets and be able to explain why the market is behaving as it is.

It is paramount that you deal with an Investment Advisor that provides exceptional service. When you have a question and need clarification, your advisor should be there to provide answers in a timely manner! An advisor should be front and centre especially in volatile times like today, when investors need direction and a plan to weather these turbulent markets.

Good Time For a Second Opinion

If you think that your investments are not being looked after, you are probably right. You deserve better! There are many good quality advisors that provide excellent service, follow and understand the markets and put the needs of their clients first. As an investor, you should be searching for an advisor that has these qualities. 

Call me today if you would like a second opinion on your portfolio.

Meet Allan Small

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