Young people have heard it before, probably from nagging parents — it’s never too early to save.
And with tax season upon us, the badgering is probably amplified as the March 1 Registered Retirement Savings Plan deadline looms for the 2012 tax year — but should younger people be concerned about contributing to RRSPs or should they put their money into tax-free savings accounts?
For many, the latter may actually be the best bet, but it comes down to what their goal is.
There are only two ways to get RRSP money back: Buy a home for the first time or use it for retirement.
While most first-time homebuyers don’t think about retirement until they buy a house according to Derrall Farmer, partner with Western Financial Group, any contribution is a good one.
“Saving in either tool as long as you’re starting to save something is the most important part of it,” he said. “As tax income grows, and tax planning becomes part of the equation, then you start to pick and choose whether you’re going TFSA or RRSP.”
For younger people, Farmer’s message is simple: Do something.
Not many people know an RRSP can be drawn down for a first-time home purchase, Farmer said.
“It’s not well-known amongst (the younger) generation ... and I wonder what percentage of that age group is thinking that far ahead.”
The Home Buyers’ Plan acts as an interest-free, 15-year loan that allows first-time homebuyers to withdraw up to $25,000 from their RRSP without penalty. A married couple can withdraw $50,000.
When an RRSP contribution is made, the amount is deducted from the taxable income come tax season. The investment builds interest and the government keeps its hands out of it. However, if the money is drawn out, the money is fully taxable.
For TFSA, there’s a little more flexibility.
There is no tax deduction when you contribute to a TFSA, but your tax-free earnings are free of tax when you withdraw them. It stands to reason that you want to be taxed when you are in the lowest bracket.
It’s a saving mechanism, you can put money in there and anything that grows inside there is tax-free, so that’s the big benefit.
Over the past couple of years, Canadians have lost their knack for saving money, and for younger savers, the money may be burning a hole in their pocket, and an RRSP forces savings.
Despite the best advice from financial advisers, there has been a rise in the number of Canadians diving into their RRSP accounts.
A Scotiabank survey shows 36 per cent of holders withdrew funds in 2012, up from 23 per cent in 2005. Forty per cent withdrew funds to buy a first home, 16 per cent used the money to pay down debt and 14 per cent withdrew money to cover day-to-day expenses.
“You’re going to have to think long and hard before you withdrawal, because you could be facing quite a healthy tax hit,” Farmer said.
If you want to use the money, a tax-free is obviously the way to go, but the real benefit of an RRSP is that you can’t get to it even if you wanted to.
It’s never too early to start, or to sit down and gather some information.
Republished from the Brandon Sun print edition February 19, 2013