4. Tax Advantaged Accounts Flashcards
In Canada what are certain accounts designed to provide?
Tax advantages for saving and investing
How do these accounts designed to provide tax advantages for saving and investing encourage long term financial planning?
By offering tax-deferred growth, tax-free withdrawals, or other benefits
What are 2 of the most popular accounts with special tax attributes?
- The Registered Retirement Savings Plan (RRSP)
- Tax-Free Savings Account (TFSA)
What is the purpose of the RRSP?
To encourage individuals to save for retirement by offering specific tax advantages for contributions made into the RRSP
What do individuals that make contributions to the RRSP receive?
A tax deduction for the full contribution
How does the tax deduction received for the full contribution of the RRSP represent an immediate tax savings?
Individuals that make contributions to the RRSP receive a tax deduction for the full contribution, which reduces your taxable income for the year
When do the investments made within the RRSP grow tax free until?
The funds are withdrawn
Withdrawals from RRSPs are taxable at what rate when the funds are taken out?
Fully-taxable as income at your marginal tax rate
Typically what level of income do individuals have in their retirement years?
Lower income level in their retirement years, reducing the tax payable on the income made from RRSP
The RRSP has an annual contribution limit meaning that individuals can contribute up to how many % of the prior year’s earned income, and subject to what maximum limit?
18% of the prior year’s earned income, subject to a maximum limit that’s set anually
For 2024, what was the maximum RRSP contribution?
$31,560
What does unused contribution room being able to be carried forward indefinitely mean?
if you’re unable to make a contribution in the current year, you can utilize that limit in a future year
How does the TFSA provide a tax free growth investment within the account to individuals?
With a flexible way to save or invest, as after-tax funds can be deposited into a TFSA, with a tax free growth of investment within the account
Are withdrawals from the TFSA taxed?
No withdrawals from the TFSA (investment earnings and principal) aren’t taxed
Are there deductions to taxable income for contributions made in the year for TFSA?
No deductions since contributions to the TFSA are made with after tax dollar
When do TFSA contribution rooms start?
In the year you turned 18, and it accumulates every year after that year
Why does the annual TFSA dollar limit vary annually?
As the amount is indexed to inflation
What was the annual TFSA dollar limit in 2024?
$7,000
Similar to RRSP, in the TFSA what happens to any contribution room that isn’t used in the year?
Carried forward
Someone that turned 18 in 2017 would have how many $ of contribution room available in 2024?
$48,500
How to individuals not lose out on the tax advantaged account with usage with a TFSA?
Amounts withdrawn are added back to your contribution room in the following room, significantly increasing the flexibility of the account
