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Which vehicle should I invest my savings in?

Updated: Apr 14, 2021

Without the ability to spend on trips to the sun or around the world, the year 2020 and early 2021 have provided you with savings, often substantial. How should I invest them? Here are some considerations.


Canadian Economic Recovery Benefit (CERB).

Did you know that if your employment income (including self-employment income) is $38,000 or more for the 2020 calendar year and you received the C.E.R.B., you will have to repay $0.50 of the C.E.R.B. for every dollar of net income earned above $38,000?


Let's look at an example. Your net income is $40,000 and you received $3,000 of ECP. You will have to repay 50% of ($40,000 - $38,000), or $1,000. If you invest $2,000 in your RRSP to bring your net income to $38,000, you will not have to repay the $1,000 and you will get a tax refund of about $500, for a first year return of 75%. Who can beat that?


Note that the CDRB is taxable, but does not count in the calculation of net income to calculate the refund.


Spousal RRSP

The thumb rule for RRSPs has always been to invest in them if you think you will be in a lower tax bracket at retirement than you were when you were working.


If you earn significantly more than your spouse and have saved a lot of money in 2020, you can contribute to your spouse's RRSP and get two benefits. You'll reduce your taxable income both for this year and when you tap into your RRSPs in retirement.


Old Age Security (OAS) clawback tax

If your income is too high in a year when you receive the OAS, you will be required to repay a portion of it. This amount is based on the difference between your income and the threshold for the year. The first step is to determine how much of your income is above the threshold. You must repay 15% of this amount.


Example:

The threshold for 2019 is $77,580.


If your income in 2019 was $90,000, the amount to repay would be 15% of the difference between $90,000 and $77,580:


90 000 $ - 77 580 $ = 12 420 $

12 420 $ x 0,15 = 1 863 $


You will have to repay $1,863 for the period from July 2020 to June 2021.


Amounts withdrawn from an RRSP or RRIF count towards income. Withdrawals from a TFSA never count towards your income.


So, in your case, RRSP or TFSA?

How many of you have had to withdraw money from your RRSP to make ends meet in 2020? In a few weeks, you will have to pay taxes on these withdrawals. Did these withdrawals occur during a market downturn?


Experts recommend building a reserve fund that will last for six months. The TFSA is the ideal vehicle to do this.


As you can see, there are many things to consider before choosing an investment vehicle. That's why it's important to consult an expert in the field, your financial security advisor.

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