RRSP, RESP, TFSA and Pensions

What is an RRSP?

An RRSP is a registered account that allows you to make tax-deferred contributions towards your retirement savings plan. Subject to certain limits, each dollar you contribute to the plan lowers your taxable income by the amount you invest. Once you have made a contribution to an RRSP, your investments can grow tax-free until withdrawn.

The goal is to defer your tax payments on the money you contribute until you’ve retired, at which point you will most likely be in a lower tax bracket.

What is a TFSA?

The new Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
How the Tax-Free Savings Account Works

  • Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
  • Contributions are not tax-deductible.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
  • Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death.

 

What is an RESP?

A Registered Education Savings Plan (RESP) is a registered plan that allows family and/or friends to contribute towards a child’s education. Contributions to the plan can grow tax-free over the life of the plan.

Benefits of an RESP

  • Tax-deferred investment growth
    Contributions made to an RESP can accumulate and grow tax-free over the life of the plan. When withdrawals are made for the purpose of education, only the growth and grant portion of the plan is taxable in the hands of a child. Moreover, because your loved one will likely be reporting a low level of income while they are attending school, the amount of tax they can expect to pay should be minimal.
  • Easy access to government grants
    Your contributions to an RESP may qualify for the CESG. Through the Canada Education Savings Grant (CESG), the federal government will contribute 20 per cent of your annual RESP contribution to a maximum of $500 per child per year.
  • More control and flexibility
    With an RESP, you have complete control over how much you contribute each year, subject to a lifetime contribution of $50,000 per beneficiary. Furthermore, you can invest in a variety portfolio of growth-oriented investments.

What is a pension?

A pension is a steady income given to a person usually after retirement. Pensions are typically payments made in the form of a guaranteed annuity to a retired or disabled employee. Some retirement plan designs accumulate a cash balance that a retiree can draw upon at retirement, rather than promising annuity payments. These are often also called pensions. In either case, a pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also fund pensions.