BUILDING WEALTH

Emily has launched her career, and is starting to think about her first home. She wants to buy a home within the next five years while also building good investing habits for her long-term future.

• Focus: Utilizing the right accounts for a first-home downpayment, while ensuring flexibility for future goals.

• Strategy:  Emily’s first move is to utilize an FHSA. This allows her to contribute up to $8,000 per year (to a lifetime maximum of $40,000). Contributions are tax-deductible, and qualifying withdrawals for a home purchase are completely tax-free — a unique opportunity that combines the best features of an RRSP and TFSA.

  With any additional savings, Emily also contributes to a TFSA. This provides flexibility if her home purchase ends up being smaller than expected and excess funds can stay invested for retirement or future goals without triggering tax.

  Because her timeline is about five years, Emily invests more conservatively than someone saving for retirement. Early on, she may hold a balanced mix of equities and fixed income to capture some growth. But as she gets closer to her target date, she may gradually shift toward lower-risk holdings. This way her downpayment is more isolated from short-term market swings when she is ready to begin searching for her home.

Michael is a physician who operates through a professional corporation. He draws enough salary to cover his family’s lifestyle, but is wondering what to do with the additional earnings in his corporation. He is naturally conservative with his money and admits he feels nervous about market swings.

• Focus: Growing wealth in a tax-efficient way, while staying within his comfort zone.

• Strategy: Michael should consider increasing his salary to maximize his RRSP contributions each year. By taking salary instead of dividends, Michael increases his annual RRSP contribution room through higher earned income. Michael’s risk tolerance is low and he prefers safer income-bearing investments like bonds. Holding these inside his RRSP is more efficient than inside the corporation. Inside a corporation, passive investment income is taxed at some of the highest corporate rates in Canada. In an RRSP, income, dividends and capital gains compound tax-deferred and are all taxed as income at the time of withdrawal.

  He also contributes to his TFSA, using it for additional conservative investments where growth can compound completely tax-free. The TFSA also provides flexibility as funds can be withdrawn if needed. Only after his RRSP and TFSA are fully contributed does Michael leave surplus cash in the corporation. Here he could take a different approach by allocating more to growth-oriented investments. Capital gains receive more favourable tax treatment compared to passive income inside the corporation. By concentrating the more volatile assets in his corporate account, Michael can keep his personal RRSP and TFSA focused on lower-risk holdings — giving him peace of mind and still allowing him to maintain an overall lower-risk investment portfolio.

John and Jane are raising two young children while balancing saving for their own future. They want to invest in their children’s education while also building retirement savings.

• Focus: Managing competing priorities — kids education and saving for retirement.

• Strategy: John and Jane open Registered Education Savings Plans (RESPs) for their children. They contribute $2,500 per beneficiary each year to capture the full 20% Canada Education Savings Grant (CESG) — $500 per child, per year. Though RRSPs can sometimes provide greater long-term benefits if they expect to retire in a materially lower income tax bracket, this outcome depends on future assumptions which can be uncertain. By contrast, maximizing RESP grants provides an immediate boost and a more certain option to maximize savings.

  At the same time, they continue building their own retirement nest egg and must decide between RRSP and TFSA contributions for their residual savings or once the RESPs are fully contributed. They both expect to be in a lower tax bracket at retirement suggesting that RRSP contributions would be more beneficial. However they ultimately decide to split contributions between their RRSPs and their TFSAs so they can retain a level of flexibility to withdraw cash from their TFSAs for short-term goals if necessary (e.g. a vacation). 

  They automate their contributions, ensuring money is set aside regularly. Their investments remain well-diversified. They focus on growth in their RESPs since their children are still young and will not be attending post-secondary for over 10 years. They similarly focus on growth in their RRSPs since these will not be drawn on until retirement. They take a more balanced investment approach with their TFSAs so they can capture some growth while retaining flexibility and lower volatility for short-term goals.