Hello everyone, today I am going to write about Tax Free Savings Account (TFSA) vs Registered Retirement Savings Plan. A lot of people I've spoken to knows about the two products but don't truly understand the difference between them. To start off, the ultimate aim of these products is to promote you to save money by giving you tax incentive.

So what is TFSA? It is a special type of account that was introduced in 2009 that allow people to put money aside and any gain(interest, dividends, capital gains, etc) in that account are tax free. There is a limit to how much you can contribute every year but if you have unused contribution room then you can carry it to next year. If you were 18+ in 2009 and you just decided to open a TFSA today you'll get all the contribution room for the past 8 years.

The name is kind of misleading since it doesn't have to be a "savings" account. It can be a mutual fund account or an investment account.  I am going to use myself as an example, I have a TFSA Mutual Fund Account and a TFSA Direct Investment Account. When I invest into the stock market in my investment accounts the quarterly or monthly dividends I get are not taxed as an incomes when I withdraw it. Remember, you don't have to put it in a savings account.

RRSP has been around for a long time, but the concept is similar to TFSA. You can have RRSP Mutual Fund or RRSP Direct Investment. The difference is when you contribute to your RRSP that amount gets deducted from your income when you file your tax. Let say you make $50,000 annually and you contribute $2000 to your RRSP then you only get tax as if you were making $48,000. When you file your tax return you'll get some money back if tax was deducted from the $2000. Some HR department will not deducted the tax from your pay if you let them know ahead of time so you don't have to wait for CRA to give you your money back. However, when you withdraw from your RRSP it'll be taxed as income.

Most of my understanding of the two is by reading the CRA website as well as a book call "The Wealthy Barber Returns". The book by David Chillton, he was on Dragons Den for a few seasons, have a whole chapter on this very topic. He breaks it down in details the difference between the two and concluded that they are very similar so it's really a personal choice. Have a read if you get a chance, the book also provides other useful financial information.

  1. Tax - The difference is when do you want to be tax. You'll either pay your normal income tax and take your after tax earning to contribute to your TFSA. Or, you can take your pre-tax earning, contribute to your RRSP and get tax when you take the money out. The key thing to consider is what your tax bracket is right now compare to your tax bracket will be when you retire. 
  2. Flexibility - TFSA is by far way more flexible than RRSP since you can take money our of your TFSA anytime like a normal savings account. RRSP is usually more complicated because of the tax implication during withdrawn.
  3. Contribution - In most cases TFSA has a lower contribution limit than RRSP. TFSA currently has a contribution limit of $5,500 per year plus any unused contribution room from previous years. They also inflation index contribution limit from previous years. RRSP has a contribution limit of 18% of your last years income on your tax return to a maximum of $26,010. Therefore you can actually save more money with RRSP.
One big thing I want to point out for TFSA is the potential for a substantial amount of tax free income. Let say you continue investing the maximum amount every year for 20 year in your TFSA you can easily grow it to a substantial amount. Then all passive income from your investment in your TFSA are now tax free for life. In comparison, any money coming out of an RRSP will be taxed as income. My personal recommendation is to contribute into your TFSA first before RRSP unless your company matches your RRSP contribution. I personally don't have a RRSP since I contribute to a define benefit pension plan with the government. Hope this post helped and if you have any comments feel free to put it in the comment section.

Resource - Here are links to the CRA website for both product.

TFSA - http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html

RRSP - http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html


Rich vs Wealthy

Hi, haven't been able to post much lately due to the birth of my son. Today I just want to quickly share something that I've read a while back. The difference between rich and wealthy.

Rich - Someone that has alot of money.

Wealthy - Someone that never have to worry about money.

I enjoy this simple definition of the two, because it highlights that you don't neccessary have to be rich to become wealthy. I personally think that being wealthy is a better goal to strive towards to rather then being rich. At the end of the day both definition are hard to create tangible goals out of, so it's important to translate your long term goals into something measurable.

Happy mother's day!


Neighbour Joe's Saving Tips

Here are some cost saving tips that I have learned over the years. My post about my monthly budget also talked about a few cost saving tips that my wife and I uses.
  1. Utilities Cost Doesn't matter if you rent or own a house you'll still need to pay for utilities. Depending on where you are living the price of utilities vary drastically (i.e Ontario vs Alberta). The thing about utilities is that the less you use the less you paid. A very obvious statement that a lot of people fail to use to their advantage. Here are a few things that usually cost you the most but are easy to cut back on:
    1. Heating - Setting your house to a high temperature so that you can wear T-Shirt around the house in the winter is a very costly habit. A few degree less can save you big time over the span of winter.
    2. Shower - Taking long shower does two things, uses water and uses electricity or gas to heat up the water. Just remember that it is not just the water you are using but also the boiler for the hot water.
    3. Dishwasher - Dishwasher is the same as shower, it uses hot water for washing then electricity for drying the dishes. Set your dishwasher for air dry if possible, it'll take a little longer to dry but will use less electricity.
  2. Auto Insurance A very simple cost saving measure is to increase your deductible on your insurance. This means that if you ever decide to claim insurance you'll have to pay more out of pocket for your repairs. If you think about it, most people don't claim insurance for minor incident and when you require major repairs the cost will be much higher than your deductible. Also remember your insurance policy gets taxed so having a more expensive plan means paying more tax. Increase your deductible, pay less tax and save the difference. 
  3. Internet/Cables You don't need the fastest internet available unless you have a lot of people living with you. The cheapest plan is often enough for all your internet needs such as Netflix or gaming. If you need more then upgrade to a better plan after. As for TV, I realize that a lot of on-demand option such as Netflix or Sports TV subscription will still end up being much cheaper than a cable package.
  4. Repair > Replace When something breaks in your house you can either repair it or replace it. Sadly a lot of people opt for the latter and end up spending way more than they need to. I remember when my refrigerator broke my first instinct was to get a new one to replace it. After some research on Google I was able to diagnosis the problem and end up buying a replacement part for $70. If you try to replace things when they break then you will spending a lot of money.
I'll share more saving tips whenever I discover them myself. Feel free to comment if you have any saving tips that you'll like to share.


Monthly Net Worth Update - May 2017

Nothing much happened in the month of April as I am still accustoming myself to the new expense lifestyle. Writing this blog made me focus on my finance more and this time, I do more planning with my money before randomly investing my money into what is currently hot.

Cash: $8950
Saving: $8050
Investment: $14450

Net Worth: $31450 (increase by 16.5%)

About one-third of my current investment is in the oil and gas industry. As a result, their market value is lower than their book value. I currently have about $16,000 in cash and saving which I am planning to put them into an investment this month.

In my next post, once I do my research and planning, I’ll write about what I decided to invest into and hope it is going to be a good decision.


Neighbour Joe - May 2017 Net Worth

Something I bought for my son. :)

Here is my net worth at the beginning of the month.

A month into my journey, this is my first monthly update. This month I changed my TD Comfort Growth Fund and split it into two TD E-series Index Fund. It is now invested into both the Canada and the US equity TD E-series Index Fund. This lowered my MER from 1.6% to aprox 0.4%. Now I just have to setup my regular monthly contribution again. I also called my investment broker and have (Dividend Reinvestment Plan) DRIP setup on my investment account. However, I realized that I don't own enough share in any of my holdings to have it start working. Basically the dividend I am receiving isn't enough to buy one whole share of that stock.

Cash: $165
Savings: $5
TFSA Investment: $26,597.26
TFSA Mutual Fund: $3,657.77
Real Estate: $250,000

Mortgage: $163,520
LOC: $12,561.79

Net Worth
: $104,343.24 (-8%)

As you can see my net worth went down this month. It's because last month a lot of my calculation were an approximate value. This month I was more precise with my calculation. Another reason why my net worth dropped is because of the decrease in valuation of my house based on local market activities. I think I will continue to adjust the valuation of my house going forward, until someone shows me a better way. However, if you look my investment, they actually all went up compared to last month despite not making any contributions this month. During this coming month I am going to figure out the current value of my work pension and will add it into my assets. Remember to come check back next month to see my progress.