This blog is geared towards young adults, particularly young first and second generation immigrants like me who don’t have any real estate and assets inherited from their parents here in Canada and USA. In this blog, I will help answer the following questions below based on my own experience and extensive research:
X- Resources & Definitions:
3- What is RRSP: An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan. (Applies to USCanadaonly)
4- What is TFSA: The Tax-Free Savings Account (TFSA) program began in 2009. It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible. (Applies to Canada only)
5- What is RESP: A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries. (Applies to Canada only)
- You cannot deduct contributions to a Roth IRA.
- If you satisfy the requirements, qualified distributions are tax-free.
- You can make contributions to your Roth IRA after you reach age 70 ½.
- You can leave amounts in your Roth IRA as long as you live.
- The account or annuity must be designated as a Roth IRA when it is set up.
The same combined contribution limit applies to all of your Roth and traditional IRAs.
A traditional IRA is a way to save for retirement that gives you tax advantages (USA)
- Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and
- Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.
7- 401K: A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.
- Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
- Employers can contribute to employees’ accounts.
- Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).