GIC, RRSPs, TFSAs, HEEEELLP!

[kl1618]

Ok, here is our situation. I am a nursing student, soon to be graduated in 1.5 years at which point I will join the full time work force (oh joy!). My partner is a plumber who makes around $80,000/year. He does not like money talk, and until I came along had been accruing credit card debt. He struggles with anything to do with money -- he is one of those! Luckily, he makes enough money to make some hella payments, so I got that whole debt thing sorted and we are debt free (discounting my student loans...rats!)

We have $25,000 in the bank just sitting there. And my partner has $10,000 in RRSPs.

We are not wanting to make any big purchases in the next year, so I think we should put our money away into savings. But I don't want the majority of our money to be locked away for a number of years because we want to buy a house within the next 5 years.

Can you suggest how much we should be put into a mutual GIC? We could easily put away for a 1 year GIC, but should we leave our bank to find a better rate? How much should we put into Tax Free Savings Accounts? How much should we contribute to RRSPs? My partner has not been contributing as much as he could to his RRSPs, so this year he can contribute a lot, up to the tens of thousands I believe. This is all so much to consider!

I could really use some ideas. Thanks so much!!!

[UnknownXV]

I would most definitely recommend the maximum contributions towards a TFSA. You don't pay any tax on the investments in this, even when you go to take it out. There's no reason not to take advantage of this.

As for the RRSP, the same applies but in a different way. If your partner can contribute ten thousand dollars to it, in one year, that will knock off a MASSIVE amount of taxes owed. In the order of receiving over $4,000 on his refund. Maybe more. Again, no reason not to take advantage of this if you can.

Buying a house is a good idea depending on your region. I would say, if you still have money leftover to save after maxing out your RRSP AND TFSA, that putting the rest into a mutual fund could be a good idea. The return on them is usually better than a GIC, and you can cash in that money easily. Although you do pay taxes on any gains (if you put in $10,000 and pull out $12,000, you'll pay tax on that $2,000 you acquired).

[kl1618]

My struggle lies in not knowing how much to put into TFSA and RRSPs. Say I want to take $21000 and put it into a savings plan. We can contribute $20 000 into TFSA this year, and just as much into RRSPs. So how do I decide how much to put into each one?

[snafu]

I'd start by maximizing your TFSA. BF needs to talk to someone at CRA or a general accountant who specializes in RRSPs. Looking at his latest 'Notice of Assessment,' he will see how much he is eligible to contribute. He needs to know how much it reduces his 2012 income tax [determined Apr. 2013].

The issue is once contributed to RRSP, monies are charged penalties + tax if cashed out [except rules about buying a house]. Years later, RRSP income will be taxed at future [unknown] rates. Adding to the problem, governments changes the rules. For example, they recently increased retirement age to 67 from 65 y/o. A few years ago, government demanded all retirees once 72 y/o withdraw a minimum of 4% of RRSP holdings each year paying income tax on those sums.

It's critically important to have a retirement plan. When you no longer work you still need to look after needs [home/utilities/food/clothes/car/insurance]. Many Canadian employers continue to fund defined Pension Plans. They automatically deduct approximately 7% of all income & contribute a similar amount to create a [portable] pension plan for employees. A limited RRSP allows Canadians to choose how to invest their money and get a partial tax deduction. The banks have terrific, low cost RRSP programs for individuals.

[UnknownXV]

I'd start by maximizing your TFSA. BF needs to talk to someone at CRA or a general accountant who specializes in RRSPs. Looking at his latest 'Notice of Assessment,' he will see how much he is eligible to contribute. He needs to know how much it reduces his 2012 income tax [determined Apr. 2013].

The issue is once contributed to RRSP, monies are charged penalties + tax if cashed out [except rules about buying a house]. Years later, RRSP income will be taxed at future [unknown] rates. Adding to the problem, governments changes the rules. For example, they recently increased retirement age to 67 from 65 y/o. A few years ago, government demanded all retirees once 72 y/o withdraw a minimum of 4% of RRSP holdings each year paying income tax on those sums.

It's critically important to have a retirement plan. When you no longer work you still need to look after needs [home/utilities/food/clothes/car/insurance]. Many Canadian employers continue to fund defined Pension Plans. They automatically deduct approximately 7% of all income & contribute a similar amount to create a [portable] pension plan for employees. A limited RRSP allows Canadians to choose how to invest their money and get a partial tax deduction. The banks have terrific, low cost RRSP programs for individuals.

When you withdraw from an RRSP, it counts towards your personal income of that year.. but unless you earned more than your deductions and credit would expunge, you won't pay tax on that (besides capital gains tax on interest accrued).

So it's not so bad, in the case of an emergency, where your income won't actually be that high for the year.