RRSP, TFSA or Insurance Products, Which One Should You Choose?

It is that time of year again, the time where you are inundated with ads to invest in your Registered Retirement Saving Plan’s (RRSP). I am often asked by clients young and old whether they should be investing in an RRSP, TFSA or Insurance Product. My simple answer is: all of them and sooner rather than later!
There are specific amounts the government allows you to invest in registered accounts. Your RRSP contribution limit for 2019 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,500. Any pension plan will proportionately reduce the contribution room you have personally. The TFSA contribution limit for 2019 is $6,000, up from $5,500 in 2018. With the TFSA limit at $6,000 for 2020, the total room available in 2019 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009 is $63,500. TFSA contribution room starts at the age of 18, where an RRSP is solely based on earned income.

A general rule of thumb is lower personal income individuals should focus more on investing in their TFSA than their RRSP. This keeps their RRSP contribution room for when they are at a higher income level. TFSA’s allow you to deposit after tax dollars and allow them to grow tax free and be withdrawn tax free. RRSP’s give you an upfront tax deduction from your income, growing tax free while invested. However, withdrawals are taxable.
Save today is the biggest piece of advice I give my clients. If you look at these two scenarios, there is a difference of ten years. A 30-year-old that starts investing $1,000 per month to age 65 has over $1.1 million dollars. Almost double what an individual starting at 40 years old. The 40-year-old must invest $2,000 per month to have approximately the same assets.

Some of our clients are saving the maximum allowed within their RRSP’s & TFSA’s and then ask where they can invest. This is where we may look at using insurance products such as permanent life insurance or certain health insurance products. Permanent insurance products have special tax rules that allow money invested to grow tax sheltered. Some health insurance products allow for the premiums to be returned to the owner should a claim not be paid after a certain number of years.
There is an abundance of ways to save, each client is different, each family and business has its own unique need. By sitting down with a professionally trained advisor you can uncover what works best for your scenario through a deep discovery process.
For more information, please contact our office at 604-662-5500 to start the discovery process today.

Tables created using Razor Plan, Razor Logic Systems
5% investment return used in both tables
Specific RRSP & TFSA Limits are from: https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html

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