Hey, guys. Coach Julien here. In this video, I’m going to talk to you about when is the best time to put money in an RRSP.
Hi, I’m Coach Julie, and I’m here to help you with your money matters. So I help people when it comes to saving money, investing money, and planning and protecting money. If this kind of topic interests you, then subscribe to my channel. Hit the bell button, and you’ll be notified whenever I upload new content.
When is the best time to invest in an RRSP? Here’s the order of things, and I’ve crunched the numbers and compared these programs, and this is the conclusion. The first thing you invest in is a TFSA. The TFSA is super interesting because obviously it earns investment income tax-free, just like all the other programs, but also it is not taxed when you take money out. The other thing is that if you do take money out somewhere along the way, you can add the money back. So you don’t lose that room, whereas with an RRSP, you lose the room as soon as you take money out. There are a couple of exceptions. One is the First-Time Home Buyer program. You take money out, but you can put it back in. And the other one is the Lifelong Learning program. I have videos on that. You can take a look at that for more detail.
The other disadvantage of the RRSP is that you are taxed when you take the money out, so tax just like a salary. So if you take half a million out in one shot, you’re going to be taxed just as if you earn a half-million-dollar salary. That’s going to attract a high level of taxes, whereas that doesn’t happen with the TFSA. TFSA is you put after-tax money in there, and when you take money out, it’s tax-free. The RRSP, you get a tax break when you put the money in the RRSP, but you get taxed when you take the money out. Even then, when you compare those two mathematically, it makes more sense to invest in the TFSA just because of that after-tax effect when you’ve got to take the money out of the RRSP.
The RRSP does expire after age 71. You have to make a decision. Either you convert it into a RRIF, which is like an RRSP, it’s just the mechanism to withdraw from the RRSPs, it’s called a RRIF. You can transfer it into an annuity, but either way, you’ve got to start planning to take money out. The TFSA, you’re under no obligation, doesn’t expire. You can just leave the money there, take as much money as you need. The beauty of the TFSA is that you can assign a successor holder. When you die, the successor holder will inherit not only the money but the account and all the advantages that come with the account. So that’s very interesting, whereas the RRSP is only tax. There are some ways to delay taxation, but in the end, that money will be taxed. I’ve got some videos on that.
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So, guys, here’s the order: First, TFSA; second, RESP; if you have kids, RESP is a super program; third, RRSP. That’s the order of things. When you contribute to your RRSP is when your TFSA is capped. You’ve put the maximum amount you can in the TFSA. If you have kids, you’ve maximized the RESP program. You can’t put any more. You’ve maximized that. Third, the RRSP.
They’ve crunched the numbers. TFSA is way more advantageous than the RRSP program, even if you get the tax credits. The thing is, I’m calculating on an after-tax basis. So, at death, you don’t have to pay taxes. When it comes to the TFSA and RESP, the advantage of that program is every time you put money in there, you get free money. The federal government gives you up to $500 or 20% of your contribution, up to $500. And the provincial government, depending on what province you’re in, they’re going to put some money too. So you’re getting free money. It’s grant money.
In the RRSP, the investment income is income tax-free. When you pay taxes on the RRSP is when you take the investment income out and the grants. Your original contribution, you can take out tax-free anytime, no problem. It’s the investment income and the grant money that will be taxed. But it’s not taxed on you; it’s taxed on your child as long as they enroll in a post-secondary program. Basically, you’re getting free money. And when you take that money out, it’s at a reduced tax.
So, the RRSP program is excellent once you’ve capped the TFSA and the RESP. Then you can start thinking about contributing to your RRSP. And to take full advantage of the RRSP, you’ve got to invest the tax credits. If you don’t invest that, then the RRSP program is not that interesting. Mathematically, you might as well put it in a non-registered account.
Now, there are advantages to the RRSP. Great for some Canadians. The advantage of the RRSP is that it’s difficult to take money out. So for those of you who don’t have the discipline and are tempted to take money out of your savings, then the RRSP program may be good for you just for that. That has merit because it’s difficult to take money out. It’s expensive to take money out, and that could be a good thing for those of you who are attempting to take savings out and buy, like what Robert Kiyosaki calls “doodads.”
“Doodads” like boats, fancy cars, furniture, electronics, and stuff that depreciates the minute you buy them. So those are “doodads,” and ideally, you don’t buy those things unless you have money to blow.
So there you have it, folks. Hope you enjoyed the video. If you did, hit the like button, and don’t forget to sign up because I have more videos coming. Thanks for watching today, folks, and we’ll see you real soon.