Battle of the bands…RRSP vs TFSA

 

You hear these terms all the time, especially in January and February, so what do they mean?

Registered Retirement Savings Plan (RRSP)

Why?

Because you won’t be a musician forever, and need something for down the road and a contribution can reduce the amount of income tax you may need to pay.  You can ALSO use up to $25,000 towards the down payment of a property or up to $20,000 (10K per year) for furthering the education of you or your significant other.

How much can you contribute?

18% of your earned income (line 150 on tax return) up to maximum of $26,010 for 2017.

If you don’t maximize your RRSP, the amount unused is carried forward to future years.  If you work a day job and your employer offers a group matching RRSP plan, go for it!

Tax-Free Savings Account (TFSA)

Why?

It’s the most flexible savings vehicle out there, and any income earned inside a TFSA is (yep) Tax-Free when withdrawn.  It can also be transferred to an RRSP to reduce taxes (but not the other way around).  It’s also a good place to stash money for income tax time.  You don't have to leave your money in an interest savings product either.  You can invest in stocks, mutual funds or ETFs. However, if you plan to use some of the money for taxes or want to save for the short term, you may want to keep some in a High Interest Savings product. 

How much can you contribute?

Maximum for 2017 if you have never contributed is $52,000.  Each year you are allowed to add more up to a set limit ($5,500 for 2017).

Basically, start saving some of your money somewhere.  You pay your booking agent, manager and PR agency, right?  What about yourself?  If you make $500 on a gig, move at least 20% or $100 to your TFSA. 

Typically, I encourage my budding musician clients to first maximize their TFSA accounts as much as they can.  Reason being, their incomes are typically lower and they can use a TFSA for just about anything including transferring funds to RRSP when their incomes increase.  The key here is to know what your income is now and what you expect it to be when you take out your money.

The A side

You have $10,000 to invest now and currently make $50,000 income. In 10 years you hope to make $100,000 in income and would like to withdraw the money.  With a 5% rate of return, you would be ahead of the game by over $2,200 with a TFSA.

The B side

You are touring like crazy now and make $100,000 income.  In 10 years, you hope not to tour as much and will probably make $50,000. With the same 5% rate of return you would be ahead with an RRSP by over $2,200.

 

 

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.

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