Should you use the TFSA or RRSP?? | Investing For BEGINNERS in Canada

[Music] what is going on you guys and welcome back to another video on the channel my name is Brandon if it's your first time here if you're new to investing be sure to subscribe we post videos every week and you can learn more about our investing Academy we're helping beginners tackle the world of the stock market that'll be that first link down in the description below but in today's video we're gonna be covering the topic of whether when to use the RRSP or the TFSA and this would be a particularly helpful video for somebody that's right in those early phases of getting started and essentially choosing what account would suit their situation best and there's really three main decision points so there's three main topics that we're gonna be covering in today's video those happen to be assessing your overall investment objective like what it is is the what is the goal that you're striving for with your personal situation we're gonna talk about your tax situation which does factor into which account may be more beneficial and then we are going to talk about dividends and in particular withholding tax on dividends when we actually talk about which investments may be more beneficial in each account and if that does sound confusing to you don't worry we're gonna break it we're gonna break it down one by one starting with of course the overall investment objective and to me this is really the top layer this is the very first question you have to ask yourself when it comes to deciding between the TFSA and the RSP ask yourself what is the overall goal with this money and I say this very loosely but let's assume we're talking here long term and short term for example if you do know that you're gonna be needing to access this money in the shorter term and let's call out a few years from now a couple years down the road whether that be to finance maybe you want to buy yourself a boat maybe you want to send this money back to family overseas there could be a million reasons why you may need this money but if you know for a fact that you're gonna be needing to dip into this pool that short-term outlook would leave me more towards the TFSA the tax-free savings account because all in all it is a much more flexible account in terms of taking money out so if I'm coming in with the expectation that I know I need money in the near future when you withdraw money from your TFSA you actually get that contribution space back in the next calendar year so you can take money out you can pop it back in you can let it grow and then when you need to access some of it you can do that all very very there's a high level of flexibility there whereas with the RRSP when you do take money out of your RSP you don't get that contribution space back once that's out and you use it for whatever you want there are also some tax complications with that but once you take many other RSP you can kiss that space goodbye you don't get it back whereas the TFSA you do so I guess from the first real question and I say this loosely take it with a grain of salt but if you have a shorter term outlook with your investments I would say that the TFSA is probably going to be your your better account again because you are getting the flexibility there with withdrawals and deposits RSP like the name implies registered retirement savings plan that really is for someone that's willing to kind of lock away some money for the long term put some money in now with the expectation that you're not going to be able to use it I'm not going to knock you be able to but you'll start dipping into that and you'll start peeling it out when you reach age 65 h/h 70 and you're kind of in your I guess your golden years now the second thing that I think is worth factoring in kind of like the second layer of decisions comes down to your personal tax situation and your income situation and what you're doing in terms of work because the RRSP account the registered retirement savings plan this is very beneficial for somebody that is currently in a high tax bracket often when you're in the bulk of your earning years kind of like your prime years where you're just pumping it put it in the hours or you have a very high income when you utilize the RSP let's not forget by the way guys if you haven't if you don't know what I'm talking about with the RSP and TFSA I'll include two links down below which does like a full on breakthrough of the two accounts you could probably pause this video now go watch those and then come back because we should know by now that with an RRSP when we put money in we can defer paying taxes we can actually get a tax break now and worry about paying those taxes later and if you're somebody that finds yourself in a high income bracket if you have a high income or high tax bracket I should say you really are getting the most bang for your buck and that's the way I kind of like to call it the most bang for your buck by utilizing your RRSP space because of course the money that you're contributing there what you're saving on taxes it's at that highest bracket it's at your marginal rate that you're pushing off and deferring so I guess to kind of build on that if you're in a high if you're in a high tax bracket obviously the RSP is a great account to use now another way to look at the RSP is this if you're somebody that let's say just started working and you're working an entry-level job you go to a good position and you're making a pretty mediocre pretty average salary but you know that over the next number of years over the next couple years over the next five years my pay is set to increase and a few years down the road my income is going to be far higher than what it is today that may be a decision for you to kind of say hey maybe I'll wait to use the RSP or at least use it against your income user contributions against your income when you're in that high tax bracket because again that's when you're deferring the most taxes at the highest rate and that's really where it becomes beneficial defer at a high rate and then years down the road you can let it grow tax-free let your investments do its thing and then years down the road when you're ideally in a low tax bracket or in retirement that's when you can start peeling it out so that's why you'll often hear I guess I'm repeating myself here but yeah look at your tax bracket look at your income and if you are getting higher up there and you feel hey I can really benefit from saving money on taxes that would lean me towards the RSP now even if you're somebody that isn't making a whole bunch of money you just kind of like a mediocre or I guess a an average kind of person you could still absolutely use the RSP I think anybody out there can use a tax break and no one would really complain about that defer those taxes even if you are in a lower tax bracket the RSP is a great account but if you're not concerned whatsoever with your tax situation again you could default to the TFSA because of the flexibility because of how overall simple it is to use but of course with the TFSA you are going to be using after-tax dollars right there's no tax break it's just a very simple account where you can pop money in let it grow and pull it out now the third layer that we'll be talking about today involves dividends and this is kind of diving into the layer where we actually talk about what investments you're gonna be holding in each of these accounts and one thing that we do and a lot of us on the channel do know this because we get a ton of questions on it and we have done videos on withholding tax I'll link that down below as well but technically speaking if you had McDonald stock let's call that a u.s. dividend stock that pays a let's say it pays a three percent dividend I'm not exactly sure and then you have Royal Bank stock which is a Canadian stock that pays a Canadian dividend this does kind of fly under the radar and a lot of people don't know this but if you hold a US stock in your TFSA and it pays a dividend those dividends are subject to a 15% withholding tax meaning that the IRS over in the States they're actually gonna hold they're gonna withhold 15% and what you actually get in your account in terms of the dividend is actually 15% less it's 50 percent less of the entire dividend now if you held that share of McDonald's in a RRSP the exact same stock with the exact same dividends in a retirement account such as the RSP those dividends are not subject to tax to withholding tax you're actually gonna be receiving 15% more by simply holding your us dividend stocks in your RRSP now in terms of Canadian stocks honestly it doesn't matter we're still receiving there's no withholding tax on the dividends here but if we were to kind of break it down as a rule of thumb us dividends are treated more favorably in the RRSP then in the TFSA as for Canada stocks Canadian stocks it doesn't matter so in the case of McDonald's and in the case of Royal Bank if you are strictly just looking at dividends and this is a very important thing to you taxes on dividends you would it would be beneficial to hold I say this lightly but it would be fed beneficial from a tax perspective to hold royal bank in your TFSA and then McDonald's or whatever US stock we're talking about in the RRSP now those are just three I guess topics for today's video I'm sure there are more and if you're thinking of one that I totally left out for this video leave it down below so that not only I can learn but others can read the comments and learn as well these are just three things that I think these are three decisions that you should kind of play yourself through and kind of go through when you're in the process of deciding whether to the RSP or TFSA at the end of the day I think these are both phenomenal accounts to use it's something that we all should be using prior to using a margin accounts just to take advantage of the tax shelter and the RSP taking advantage of deferring those taxes it's something we all should be using but it is important to do the research beforehand and ultimately try to find which is the better account for you if you guys found today's video helpful if you learned something new feel free to drop a quick thumbs up on the video that is a great way of supporting the channel if you are new to the channel like I said we post a video every week so subscribe we post all types of videos if you are also a beginner to the stock market and this stuff sounds so confusing to you and you want help with setting up your account building a well diversified portfolio we're helping Canadians do this every day we're taking them from absolutely nothing going through the process click by click how to open the accounts how to fund the accounts and how to actually go out and build their portfolios we do that through our investing Academy and you can more about that with that first link down in the description below as always I thank you guys for watching I hope you enjoyed and I'll see you in the next video you

Channel: Beavis Wealth

Views: 100,883

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Id: Onji4mwQOE4

Length: 11min 24sec (684 seconds)

Published: Fri Jan 10 2020