Canadians have a variety of registered savings plans at their disposal, each with unique tax advantages.  For British Columbians, understanding the benefits of Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and the newer First Home Savings Account (FHSA) is crucial for maximizing your savings potential.

For most of our clients, we recommend contributing to all registered accounts available to them to take advantage of the tax-sheltered growth these accounts provide. By eliminating the tax on any interest, dividends or capital gains earned on these savings, you can significantly increase your after-tax rate of returns.

Setting financial goals for yourself and working with a team of professionals to create a plan to meet these goals is a great place to start on your financial journey. With this roadmap in place, the next step is determining how registered savings plans can play an important role in achieving your goals. Here are some of the key features of registered plans to consider: 

RRSPs:

Tax Deductible Contributions: The primary benefit of RRSPs is that contributions are tax-deductible in the year they are made, reducing your taxable income.

Tax-Deferred Growth: Investments within an RRSP grow tax-free until withdrawn.

Retirement Focus: RRSPs are primarily designed for retirement savings, with withdrawals taxed as income. Keep in mind your tax rate is typically lower in retirement.

TFSAs:

Tax-Free Growth and Withdrawals: The key advantage of TFSAs lies in their tax-free nature.  Investments grow tax-free, and withdrawals are not subject to income tax.

Flexibility: TFSAs offer greater flexibility than RRSPs, allowing for withdrawals for any purpose without tax implications. Your contribution room also continues to grow every year regardless of withdrawals.

Long-Term Growth: TFSAs are well-suited for long-term savings goals, including retirement, but also for shorter-term objectives like down payments or major purchases.

FHSAs:

Homebuyer Focus: The FHSA is a relatively new option specifically designed to assist first-time homebuyers.

Tax-Deductible Contributions and Tax-Free Withdrawals: Similar to RRSPs, contributions are tax-deductible.  However, withdrawals for a qualifying home purchase are also tax-free, offering a unique combination of benefits.

Limited Contribution Room: FHSAs have an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000, making them most suitable for those actively saving for a down payment.

Choosing the Right Account:

The best choice depends on individual circumstances:

Prioritize Retirement: If retirement savings are the primary focus or you are in a high tax bracket, an RRSP may be the most advantageous. Setting up regular, ongoing contributions to an RRSP can also give you peace of mind knowing that you are saving for the future.

Flexibility and Tax-Free Growth: If you need flexibility and prioritize tax-free withdrawals, a TFSA may be the best place to focus your savings – at least in the short-term.

First-Time Homebuyer: If you are actively saving for a down payment and meet the eligibility criteria, the FHSA offers a compelling option.

Important Considerations:

Consult with Professionals:  a qualified financial advisor can work with you to assess your individual financial situation, tax bracket, and long-term goals.

Contribution Limits: Be aware of the contribution limits for each account type and track your contributions carefully. Overcontributions can result in significant CRA penalties.

Investment Strategies: All registered accounts can be held in a wide variety of savings and investment vehicles including interest earning savings account, mutual funds, exchange traded funds (ETFs) and professionally managed investment accounts. Your risk tolerance and investment timeline are the key considerations when choosing appropriate investments.

By carefully considering these factors and seeking professional guidance, you can make informed decisions about how to maximize your savings potential and achieve your financial goals.

Alisa Coquet is a Wealth Associate for Comazzetto Group at BMO Private Wealth