What I’ve Learned About Finances

Financial Accounts

Chequing Account

Your chequing account is very similar to airport security. All of your money must go through here before going on an adventure. With most chequing accounts having very low to no interest, it’d be good to move any and all funds that are not needed at this time, elsewhere, like a savings account. Keep only what you need in here.

Savings Account

As mentioned above, place your money here. At least any money that you’ll not need for bills, interact transfers, and other withdraws. A savings account is like a chequing account except you shouldn’t touch it. It get’s a higher interest rate (somewhere around ~2% compared to a chequing’s ~.15%), and should be used to save money.

TFSA (Tax Free Savings Account)

Know the ~2% interest I mentioned you’d be getting from your savings account? It get’s taxed. Don’t want it to get taxed? Put it in here. It’s 2016, it was created by the government in 2009. You’ve got 46,500 of room to contribute if you’ve never done so.

Need specific info? Sign up with www.cra.ca to see your contribution room and a lot of other info. The catch is, if you take money out of the account, then you can’t put that amount back in until January 1st of the next year. Example? Sure. You put in 46,500; you’re maxed out. Then you forget you need money for you Mom’s Mothers Day gift andyou take out 5,000, nice! If you put any of that 5,000 back into the account before Jan 1st, you’ll pay 1% interest on it. So don’t over contribute, or put money back in once you’ve taken it out in the same year.

A really awesome feature of TFSA’s is that they’re containers for investments. Yes a TFSA is a savings account, but think of it like a picnic basket with a bunch of food inside. You put your money into the picnic basket, and now that it’s there, you can choose if you want to earn the default ~2% interest untaxed, or buy the apple that’s there, the tangerine, or the banana (the food represents mutual funds, index funds, ETFs, GICs). Which ever you choose to buy into, the returns will be tax free!

Pros

• No tax on interest.
• It’s a container to allow you to make investments without getting taxed on the returns.

Cons

• If you take money out, your contribution stays used up as if that money is still in there, except.. it’s not, and you get taxed 1% on the amount over contributed for the rest of the year.

RRSP (Registered Retirement Savings Plan)

This ones a bit different.

If you contribute to an RRSP that contribution you made will be deducted from your income. So a 5,000 contribution from your 50,000 income will mean you’re only being taxed on the 45,000 because as the government sees it, that’s all you made. But wait, what about the tax’s that you’ve paid on the 50,000 all year? When it comes tax time, report your RRSP contributions on your tax return and the government will give you the money they taxed you, back.

However, if you want to then take that money out of the account, the government will take 10% (10–30% based on amount withdrawn) of whatever amount you withdraw and hold it until the end of the year so they make sure you pay taxes on the withdraw.

If you’re wondering what the positives of this account are, let me explain.

You’re 25 and you make 100,000 a year. You contribute 10,000 to an RRSP this year. You now make 90,000 for the year and the government gives you 3,000 back because you’ve been paying taxes on your pay cheque for 100,000 all year. Flash forward 10 years into the future. You’re retired, and you withdraw 10,000 over the course of a year. That 10,000 is taxed in the 10,000 tax bracket, not the 100,000 bracket that you actually made the money in.

Recap. The top 10,000 of your 100,000 salary will be taxed at ~30%, but if you deposit it into a RRSP and withdraw it later in life when your income for the year is lower, it’ll be taxed at the lower tax bracket, let’s say 10%. The difference? 30% tax bracket 10,000 = 7,000. 10% tax bracket 10,000 = 9,000.

So not only will you get the 3,000 at the end of the year to either re-invest into an RRSP, or use else where, you’ll also get less taxes taken off your money when you need it.

The flip side of this is when you make less now, contribute to your RRSP, then withdraw later in life when you’re making higher income. The withdraw will be added to that years income and it’ll be taxed at the higher %.

A side note. Any withdraws made within 3 years of contributing will be taxed based at the same income range you were at when the contribution was deposited.

Pros

• You will lower your income by putting money in, which will provide you with money back during tax time.
• Withdrawing when you’re in a lower tax bracket will mean your money earned now, will be taxed less than when it was earned.

Cons

• Withdrawing when your income is higher than when you contributed will put your money in a higher tax bracket and you’ll keep less of your money. If doing this, then a TFSA is a better option because you can withdraw whenever you want and there is no taxes when doing so.