Have you been contributing to your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) on an occasional or regular basis? GOOD FOR YOU! It pays to be consistent! But did you know that these investment vehicles can do more than provide a steady income stream in retirement? Here are five projects you can finance with these investment accounts.
1. Buy your first home
Are you planning to become a homeowner in the near future? Your RRSP can be an excellent way to finance the down payment. The Home Buyers’ Plan (HBP) allows you to withdraw funds from your RRSP on a tax-free basis to buy or build a first home. The HBP withdrawal limit is $35,000.
The new FHSA
In 2023, you may also be able to access the Tax-Free First Home Savings Account (FHSA).The FHSA will be available to people who did not own a home in the year the account was opened or in the previous four calendar years. As with the RRSP, contributions to the FHSA can be deducted from taxable income.
The annual tax-deductible contribution limit will be $8,000, with a lifetime limit of $40,000. That being said, for the FHSA, the unused contribution room that you can carry forward will be limited to a maximum of $8,000 a year.
If you ultimately don’t buy a home, you can transfer the accumulated amounts to your RRSP or RRIF 15 years after opening the account.
2. Go back to school
Whether you’re looking to upgrade your skill set or to make a fresh start, going back to school can be quite expensive. You could use the Lifelong Learning Plan (LLP) to fund yourself! The LLP allows you to withdraw funds from your RRSP to finance a return to full-time studies, for yourself or your life partner.
The LLP allows you to withdraw up to $10,000 a year to a maximum of $20,000 over a period of four years. The amount is repayable over a period of 10 years.
The TFSA also lets you withdraw funds without paying any tax. The amount withdrawn from a TFSA is added to your unused contribution room for future years.
3. Make home improvements
Renovations are costly. Whether you want to ensure your new home suits your taste or to upgrade a property you’ve been living in for some time, you can develop a savings plan to finance your renovation projects.
The TFSA is the ideal tool. It’s flexible, allowing you to withdraw funds at any time without paying tax. It’s an effective way to use your investments to increase the value of your property without using a home equity line of credit.
Planning and saving pay off
Scenario: For a major renovation project that will cost $20,000, you have the option of contributing to a TFSA or using your line of credit. How much do you think you could save with a little foresight?
Cost of renovations with a savings plan
| TFSA | Amount |
|---|---|
| Monthly contribution | |
| Monthly contribution | $310 |
| Length of savings plan | |
| Length of savings plan | 60 months |
| Expected compound return in $ (3% annualized) | |
| Expected compound return in $ (3% annualized) | $1,469 |
| Cost of renovations (total contributions) | |
| Cost of renovations (total contributions) | $18,600 |
| Potential tax-free budget | |
| Potential tax-free budget | $20,069 |
Cost of renovations without a savings plan but with credit
| Home equity line of credit (7% interest) | Amount |
|---|---|
| Balance | |
| Balance | $20,000 |
| Amortization period | |
| Amortization period | 60 months |
| Monthly payments required | |
| Monthly payments required | $396 |
| Cost of renovations des rénovations | |
| Cost of renovations des rénovations | $23,770 |
| Budget deficit (interest payable) | |
| Budget deficit (interest payable) | $3,770 |
|
With careful planning, you could save $1,400 on your initial budget by contributing to your TFSA. The same project could be 22% more expensive if you use credit1. |
4. Take your dream trip
Instead of maxing out your credit card, you could plan your trip a few years in advance. Once again, the TFSA is ideal vehicle for this kind of project. You could contribute each month to your TFSA and take advantage of tax-sheltered returns to finance your trip. It’s more appealing than paying exorbitant interest charges after you get home!
5. Accumulate an emergency fund
Whether for unplanned expenses, costly car repairs, an unpaid work stoppage or any other event, financial planners suggest accumulating an emergency fund so that you can respond to life’s ups and downs without undue stress. Your TFSA can help you cope with the unexpected; it’s the perfect financial vehicle for an emergency fund.
Bonus: If you invest your emergency funds in a TFSA, they’ll grow tax-free and won’t lose value because of inflation.
Whatever your plans – going back to school, financing your retirement or buying a home – Advisory Services at FÉRIQUE Investment Services can help you.