Feb 19, 2021

How Motive can help amplify your 2021 tax return

Teaming up your RRSP and TFSA this tax season could also see even more tax- free growth on your savings, which means reaching your savings goals more quickly.

It’s RRSP season! As the March 1 deadline to contribute to RRSPs approaches, Canadians are inundated with advice — both solicited and unsolicited — about whether they’re better off saving in an RRSP or a TFSA. Not to mention, the economic uncertainty from the COVID-19 pandemic might make this discussion all the more difficult.


But what if it’s not a one-or-the-other choice? Teaming up your RRSP and TFSA this tax season could also see even more tax-free growth on your savings, which means reaching your savings goals more quickly.


Let’s take a look at how that would work!



The advantages of RRSPs


RRSPs are a savings tool with some distinct advantages over and above the percentage of gains you receive. Most notably, the money you put into your RRSP are tax-exempt, meaning money that would otherwise be part of your overall taxable income is no longer counted towards your taxes. That’s why contributing to an RRSP leads to a reduction in the taxes you may owe — and possibly a better tax return.


Typically, RRSPs are dedicated towards longer-term savings, such as retirement. The money that you withdraw from your RRSP is part of your taxable income, which is why it’s a better strategy to leave your RRSP for a long-term goal. In the case of retirement, your annual income will most likely be lower than while you were working, so adding your RRSP withdrawals to your income after you retire won’t result in the same level of taxation as when your overall income was higher.


The advantages of TFSAs


The magic of TFSAs is that any money you gain on your savings is tax-exempt. Taxes are calculated the opposite way to how RRSPs calculate taxes, where the money you contribute is still part of your overall taxable income, but any money you take out (including interest) remains tax-free, so long as you don’t exceed your annual contribution limit. That’s why a TFSA is normally recommended when you’ve maxed out on your RRSP.


TFSAs should typically be considered when you have shorter-term goals. Unlike RRSPs, there usually aren’t any tax penalties for withdrawing from your TFSA, making them ideal if you’re not quite ready to lock your savings in. TFSAs might also be better if your income is lower because the tax deferral benefit of an RRSP might be small or negligible due to your tax bracket.


Amplifying your tax return


Adding extra funds to your RRSP before the March 1 deadline is a surefire way to see a better outcome on your taxes. But after you receive that welcome return, how best can it be used to reach your savings goals?


Depositing your return into a TFSA is one way to see that return amplified. The return you receive is already post-tax income, so placing it in a TFSA gives you even more tax-free gains. It’s like a one-two punch for your finances — suddenly, your savings goals seem a lot closer!


How are you making sure you get the most from your tax return? What savings goals will your return help you work towards? Like us on Facebook and follow us on Twitter to keep this conversation rolling.