Saving money can be hard, especially when there are so many demands on your income. The average Canadian has only $852 in savings. For most people, this is below the limit for tax-advantaged savings which come with many benefits. Tax-advantaged refers to any type of savings plan, financial account, or an investment that is tax deferred, exempt from taxation, or something that offers any kind of tax benefits. There are a variety of tax-advantaged programs to improve your savings through tax breaks and other incentives. With this in mind, you can find out more about GST credit payment dates here. However, in this post, we will discuss the best three tax-advantaged savings types to get you going. Although each program works differently, they aim to keep your money working for you.
Understanding Tax-Advantaged Savings
Many employees and a variety of investors in different financial situations use tax-advantaged accounts and investments. It provides with an array of options for long-term asset growth while maximizing your savings. While not all accounts are created equal, individuals can turbocharge their wealth building if their pay grade meets specific criteria.
The following are the types of tax-advantaged savings you might want to consider for boosting your savings.
#1 Tax Free Savings Accounts (TFSAs)
The Tax Free Savings Account, known as TFSA for short, is a type of tax-advantaged investment that doesn’t apply taxes on capital gains, dividends, interest earned, or any contributions, and can be withdrawn tax free. It is available to individuals aged 18 or above and can be used for any purpose.
- If you are 18 or older in Canada, you can save up to $6000 per year in a Tax Free Savings Account.
- The contributions are not tax deductible, and any unused room will be carried forward.
#2 Registered Retirement Savings Plans (RRSPs)
A Registered Retirement Savings Plan, RRSP for short, is an investment vehicle and a retirement savings plan for the self-employed and employees in Canada. Investors make a pre-tax contribution into their Registered Retirement Savings Plan account. It grows tax free until it is withdrawn. At the time of withdrawal, the amount is taxed at a marginal rate. RRSPs warrant that the contributions will compound without being taxed, given that the funds are not withdrawn.
- It comes with two main tax advantages – (1) you may deduct contributions against your income and (2) the growth of Registered Retirement Savings Plan investment is tax sheltered.
#3 Registered Education Savings Plans (RESPs)
Registered Education Savings Plans or RESPs are specifically for education savings. The key advantage of using a Registered Education Savings Plan is that the Canadian government chips in 20% of what you contribute up to a maximum of $2500/year – they call it CESG (Canadian Education Savings Grant).
- It is a tax-sheltered way to save for your children’s post-secondary education
- Anyone from the family including parents, grandparents, or even friends can contribute to a lifetime total of $50,000/child
- The contribution is not taxed until it is withdrawn at a marginal rate
Most people are saving less than 1% of their household income and so they could benefit from increasing their savings and using a tax-advantaged account. The government has designed several different financial programs to help people contribute more to their retirement and children’s education, among other aspects. You should look at these investment options, including other financial vehicles, to better understand how they work and which ones are best for you. It will help you build a strong financial portfolio while saving tax.
If you have any queries regarding the topics discussed, feel free to ask us.