Tax season is upon us, which means you’re about to hear lots of advice on where to invest your money.
Your bank will remind you of the tax benefits of RRSP contributions, your investment advisor will remind you that time is on your side (so invest what you can early) and everyone will offer their advice on risk.
It’s all great advice. But the end of the day, what you want to achieve will drive your investment decision.
- RRSP or TFSA? TFSA’s (Tax Free Savings Accounts) are more flexible than your 6:00am hot yoga instructor. You can withdraw any time without penalty, you aren’t taxed when you withdraw, but you don’t get a deduction for your contribution. RRSP’s are essentially a mirror image of TFSA’s. It’s harder to get your money out, you receive a tax deduction on your contribution and you are taxed when you withdraw, as it is considered income.
There’s no easy answer here. TFSA’s make it easy to raid your retirement fund for that 450hp Malibu Wakesetter, while a RRSP withdrawal later in life may unintentionally push you into a higher tax bracket.
- Invest your tax refund. Yeah, Las Vegas is fun but spending your tax refund on that trip, just so you can lose it at the Blackjack table (c’mon, stop splitting your 10s!) and wake up on the roof of Caesar’s Palace. You probably won’t remember much of it anyways. Push that money back into your retirement plan and go lose $100 at your local casino instead.
- Start Now. It’s easier said than done, but even if you have $20 per month that you can contribute to an RRSP or TFSA, then do it. It’ll pay off in a big way later on.
- Don’t Panic. Especially if you’re far from retirement, don’t pull your money out when times get tough. The market always goes up, even if it doesn’t feel like it today. In fact, now is the time to stash more money in your investment. Whatever you do, the best investment advice is to sit tight. Things will improve.
- Pay attention to fees. Yes, advice costs money, but make sure you know all the fees you’re being charged. Typically you want to keep your fees at or below 1%, but that will vary, depending on the size of your account. Larger investments equal lower fees.