Variety of options available when saving for the future

Saving for the future is difficult. It is especially tricky when running cash-intensive operations such as farming or ranching. A lot of the cash flow may need to be invested in the farm to cover debt or to continue to grow.

However, having diversity in savings and investments can be crucial for those tough times. The following is an overview of options to use when saving for the future.

Tax-Free Savings Account

A TFSA is a registered account that helps individuals grow their money tax-free. In 2019, the annual contribution limit is $6,000 and any unused room is carried forward indefinitely.

Unlike RRSPs, the money you put into the account is not deducted from your income on your tax return. However, all the earnings generated from the account, as well as any withdrawn amounts, are not taxed. These withdrawn amounts are added to your contribution room the following year. Therefore, it is important to be careful when making withdrawals and contributions in the same year.

Registered Retirement Savings Plan

RRSPs are a mirror image of the TFSA. Contributions to an RRSP decrease your taxable income on your tax return. These contributions (and earnings) are taxed only when the money is withdrawn. The contribution limit is set to 18 percent of the previous years earned income, up to a maximum of $26,500 in 2019.

Any unused room is carried forward, but unlike TFSAs, once you withdraw from an RRSP, that room is lost forever (with some exceptions). For this reason, RRSPs are more of a long-term savings tool.

Registered Education Savings Plan

RESPs allow you to build an education fund for your children or grandchildren. The contributions are not tax-deductible, but they do allow you to grow the fund in a tax-free environment. This option has the additional benefit of government matching. The government matches 20 percent of your contribution up to a grant of $500 per year and a maximum of $7,200 total per beneficiary.

When the child goes to university or college, the income portion will be taxable to the child. This usually works out well because the child will not be making as much income while she is going to school, and therefore will be taxed at a lower rate.

Power of a registered account

If you were to save $6,000 a year ($500 per month) over 40 years and receive no return, you would end up with $240,000.

If you were to put that same $6,000 a year into a non-registered account earning five percent interest for 40 years, you would end up with more than $520,000. Thanks to compound interest, the original amount would be more than double what it would have been if you just saved cash. Unfortunately, because the account is unregistered, the income generated would be subject to tax. For this example, we used a 30.5 percent marginal rate.

However, if you were to invest this same amount at five percent and allowed it to grow in a registered account, the balance after 40 years would now be over $760,000.

This is an overview of some of the options available. Speak with a professional who understands each option and can guide you away from common pitfalls.

Colin Miller would like to thank Riley Honess and Rob Mercer of KPMG for their assistance with writing this article.

Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca

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