1. Save through tax assistance
First, they have better opportunities to save through tax assistance than
Baby Boomers did, primarily because of their access to the Tax-Free Savings
Account (TFSA). Here’s what saving the maximum $5,500 a year at a 2% return
brings you after 40 years: $338,855. Even that very modest growth keeps you
ahead of inflation (at current inflation rates). Earning 1% more gives you
a real return after inflation. At a 3% return, your savings will reach
$427,148 after 40 years. If inflation were to eat away 2% of those returns
annually, your savings would still have a purchasing power of $271,564
after 40 years of deposits.
2. Take advantage of time horizon
Second, younger people have longer lifespans in which to maximize the
compounding time in their savings efforts. This means the earlier you start
to save, the more traction you will have on your efforts to grow your
investments. A Millennial who saves $200 a month, or $2400 a year, and
earns 2% doing so, will have $146,535 in 40 years and will at least keep up
with inflation in a non-registered savings account. But that won’t be
enough to stay ahead of the tax department. Earnings will have to beat 2%
to get a real dollar return (based on the Bank of Canada’s target inflation
rate); income source will make a difference too, as illustrated in the
Marginal Tax Rate Calculator.
3. Accessing RRSP funds tax-free
Third, Millennials’ tax-deferred savings options through the Registered
Retirement Savings Plan (RRSP) have been enhanced by the ability to use the
fund not just for retirement savings, but also for tax relief when major
financial disruptions occur. Specifically, the Home Buyer’s Plan (HBP) can
be accessed tax-free to help fund a home. In addition, going back to school
later in life can be funded through the RRSP savings under the Lifelong
Learning Plan (LLP). Both options require periodic repayments to avoid tax
4. Use “earned income” rules to maximize savings
Fourth, many Canadian Millennials are earning more money than their parents
did. They will, therefore, be able to put more money into their RRSPs. But
to take maximum advantage, they need to understand what earned income is
according to the RRSP rules. Here’s a breakdown from Knowledge Bureau’s
EverGreen Explanatory Notes
: A taxpayer’s earned income for the year for
RRSP purposes is defined in
S. 46(1) of the Income Tax Act.
It is composed of the sum of:
* Employment earnings minus union dues and employment expenses
* Net business income (subtract if a loss)
* CPP/QPP disability benefits
* Royalties from a work or invention
* Net rental income (subtract if a loss)
* Taxable support payments received
* Net research grants
* Employee profit sharing benefits
* Supplementary employment benefits
* Gains of Eligible Capital Property included in business income
* Deductible support payments
Note that for periods of non-residency, employment, business, and rental
income must be from Canadian sources. Millennials who are disciplined
savers, with a good understanding of their tax consequences, can really
pull ahead, despite expensive lifestyles. A good chat with a
DFA-Tax Services Specialist and an
MFA-Retirement and Estate Services Specialist can be a worthwhile investment. Alternatively, millennials may wish to take
a certificate course on these subjects – it could be the best investment
they’ll ever make. Knowledge Bureau features several online training
options — books and certificate courses — to help.
Evelyn Jacks is the founder and President of Knowledge Bureau. This
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Her latest book,
Family Tax Essentials, is now available.
Notes and Disclaimer
©2017 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.