Should This Millennial Contribute to His RRSP or Save in Other Ways?
Steven, age 31, is a successful Physical Therapist earning $65,000 yearly. He’s paid off his student debts; now, he’s focused on saving for future goals including creating a great retirement. What is the best way for him to save money and avoid taxes?
Steven is in a good position to create wealth for himself. Smart budgeting has helped him pay off student loans, and be largely debt free. His next strategic move would be to take a long-term approach. He needs to consider the future implications of a successful career, which is likely to put him in a higher tax bracket.
He might want to delay contributing to his RRSP until then. His contribution room will continue to accumulate yearly, and this is a great option for him to leverage when he needs the tax credits more.
But he needs to create a powerful savings vehicle for right now to save for emergencies, or perhaps a house or other major purchase in the future. Until Steven hits that higher tax bracket, he could focus on building a Tax- Free Savings Account (TFSA).
In this account, he can keep some cash for an emergency fund or save for other goals. But its power comes from how Steven can hold investments within it.
They will compound yearly, growing his wealth tax-free. In addition, this account protects Steven’s investments from capital gains, interest income and dividend taxes.
That protection is one of the greatest advantages of a TFSA account. The contribution limit for 2020 is $6,000, but like an RRSP, your contribution room accumulates over time.
Steven could also contribute money into his RRSP and defer the deduction until he is in a higher tax bracket, to capitalize on the tax savings at that time. He could also accumulate funds in a TFSA to make an RRSP contribution later.
You can create a smart savings and tax strategy like Steven’s. Ask your Financial Advisor for help.