Starting the process of accumulating wealth of course is important, especially if we would like to maximize our financial resources in the future. Starting a plan is relatively easy and sometimes this starts by simply opening a savings account as a child at a bank. At some point hopefully, it is realized this is not the path to building significant wealth, especially these days with almost no return on bank savings accounts.
We look forward to assisting each client with the process of accumulating wealth in the best way, using the right accounts depending on the goals. However, things get much better as we look at maximizing the wealth that is being built. Please check out the information in the Wealth Maximization section.
Some of the things that regularly come up in the wealth accumulation phase are:
Registered Retirement Savings Plans (RRSPs)
RRSPs are a useful way to save for those earning income and the higher the income the better. This is due to contributions to an RRSP create a tax deduction which then will either reduce the amount of tax owing or will generate a tax refund. Therefore, the higher the income level the more desirable the RRSP is due to our marginal tax system whereby the percentage of tax increases the more one earns.
Up to 18% of the previous year’s income can be contributed to an RRSP for those over the age of 18 up to annual maximum limits. Unused contribution limits from previous years are carried forward indefinitely. See “The Financial Planning Facts & Figures” for more info on RRSP contribution limits. The income earned in the RRSP is tax deferred until it is withdrawn.
Those earning lower amounts of income may want to compare saving in a Tax Free Savings Account (TFSA) versus an RRSP as in the long term it may be more advantageous if there is room available to be used in the TFSA.
RRSPs can also be used when purchasing a first home through the Home Buyers’ Plan and also for those pursuing further education through the Lifelong Learning Plan. Click on these links for more information on the Lifelong Learning Plan or the Home Buyers’ Plan.
Withdrawals from an RRSP are taxable income so one has to plan around withdrawals to avoid paying unnecessarily high tax. Currently prior to the end of the year that the RRSP plan holder turns 71 the RRSP must be either converted into a Registered Retirement Income Fund (RRIF) or a registered annuity. See the RRIF section for more information on this plan.
Upon death of the RRSP plan holder the RRSP is fully taxable unless beneficiary designations have been set up beforehand to a surviving spouse or common law spouse or financially dependent child or grandchild, allowing the RRSP to be transferred on a tax deferred basis.
- Registered Retirement Income Funds initially will have come from an RRSP that has been converted into a RRIF. This conversion can be done at anytime but no later than the end of the year that the RRSP plan holder turns 71.
- Income earned in the RRIF is tax deferred and will only be taxed upon withdrawal.
- In the year following the conversion to a RRIF the plan holder must withdraw at least the minimum amount required to be withdrawn. There is no maximum but the minimum must be withdrawn each year. See here for more information on the annual withdrawal minimums
Upon death of the RRIF plan holder the RRSP is fully taxable unless beneficiary designations have been set up beforehand to a surviving spouse or common law spouse or financially dependent child or grandchild, which may allow the RRIF to be transferred on a tax deferred basis.
- Tax Free Savings Accounts (TFSAs) were introduced in 2009 and have been a great way to save for many Canadians. The advantage of the TFSA is that any earnings are tax free which is a huge benefit. There are annual contribution limits which if unused are able to be carried forward indefinitely. See here for more information on TFSA contribution limits:
- Registered Educational Savings Plans (RESPs) are typically a great way for parents and grandparents to save for their children and grandchildren. Click here for more details
- The government of Canada will provide at least a 20% Canada Education Savings Grant on contributions up to $2,500 per year. Provisions also exist to allow for contributing unused contribution limits from previous years subject to certain conditions.
The government of Canada also contributes up to $2,000 of the Canada Learning Bond for families with lower incomes dependent upon the number of children in the family. Click here for more details.
In BC the BC government also will contribute $1,200 to an RESP in the form of the British Columbia Training and Education Savings Grant for children born in 2006 or later. Click here for more details.
Informal Trust Accounts
- Informal trust accounts can also be an effective way to save for minors. Possibly if one wants to contribute more than what qualifies for the Canada Savings Grant under the RESP program.
- One has to be careful when using Informal Trust Accounts and a good article explaining the proper use of these accounts can be found here.
Registered Disability Savings Plans (RDSPs) are government savings plan for those with disabilities to assist in building a long-term savings account for the person with a disability. Check here for more information.
- Two elements to the plan – the Canada Disability Savings Grant and the Canada Disability Savings Bond
- The Canada Disability Savings Grant – eligible for Canadian residents up to 49 years old. Depending on the family income the grants can be up to $3 for each $1 contributed up to $1,500.
- The Canada Disability Savings Bond – requires no contribution and is higher for those with lower family incomes. For example, if the adjusted net family income is less than $30,000 the bond is $1,000 per year to a maximum of $20,000 up to age 49.
- The money needs to be in the RDSP for a 10 year minimum, otherwise repayment of the grants and bonds would have to be made.
- A maximum of $200,000 could be contributed into the RDSP.
- Contributions can be made until the end of the year the beneficiary turns 59.
- Taxable or Open or Cash accounts are non-registered accounts that are fully taxable. Care needs to be taken as to the type of investments held in taxable accounts as it may be more advantageous to hold higher interest earning investments inside tax sheltered plans like an RRSP or a tax free plan like the Tax Free Savings Plan. Dividend income and income from capital gains may be better for taxable accounts due to their preferred tax rates.
Corporate accounts (business owners)
- Corporate accounts are taxable accounts in the name of a corporation.
Holding companies (business owners)
- Holding company accounts are corporate accounts in the name of a holding company.
Group RRSPs (business owners)
- Group RRSPs are a grouping of a number of employee RRSP accounts through one or more providers (typically mutual fund companies, insurance companies or an investment dealer) and administrated by the employer in terms of remitting the RRSP contributions on a regular basis to the Group RRSP provider.
- This is an easy way for employees to save and there are some tax advantages to a Group RRSP in that the employees are able to get an automatic reduction of tax at source by participating in the Group RRSP. Therefore, if the employee is in a 30% marginal tax bracket and contributes $100 to the Group RRSP, the employees’ tax will be reduced by $30 making the effective cost of the contribution only $70.
- Mortgages for many people are the largest debts they will ever have. There are strategies and ways to structure the mortgage that can lead to it being paid off much sooner and saving large sums of interest.
- Getting the lowest rate of interest is also important and using a mortgage broker with wide access to lenders is typically a good idea.
Email Us To Learn More