What to do with your money

So much of your time is spent working to earn money, but how often do you consider what you’re going to do with that money?

The easy answer to the question “What will I do with my money” is to say “I’ll spend it,” because, as the old saying goes, you can’t take it with you.

Your initial thought might be, “I’ll spend it now on stuff I want.” Unfortunately, the reality is that it’s more complicated than that.

Let’s look at the “who.” Who will spend your money? Generally, the first person to spend your money isn’t you, it’s the government. Before you receive your paycheque, the government has taken its cut via payroll, or withholding taxes. Now, don’t fret; these taxes pay for the services provided to us by the government. That said, most people would rather decide how their money is spent. To that end, people strive to reduce the amount of tax they pay. Oddly, the government has put into place programs and policies that allow you to do just that. One example is the different registered investment accounts that are available.

Let’s take a quick look at three of the more popular programs.

Registered Retirement Plans

This catch-all includes RRSP, LIRA, pension plans, etc. The main goal of these plans is to defer income earned today to a later time, when you are retired. Your money goes in before taxes, grows tax-deferred, but is taxed when taken out. The theory behind this is that you will be in a higher tax bracket when you are working than when you are retired. For example, if all works according to plan, you would put money into a registered retirement plan when you are paying over 40 per cent in taxes, but then would pull it out in retirement, when you are paying around 20 per cent. This could save you over 20 per cent in taxes.

Tax Free Savings Accounts (TFSA)

These accounts allow you to put in after-tax money (no tax deduction) that will grow tax-free, and when it’s taken out, it’s not taxed (at least, not by the Canadian government; it is subject to withholding taxes by foreign governments). These plans are much more flexible because they can be used for short-, mid- or long-term goals. They are potentially more appropriate for lower-income people, who may not see any tax savings using registered retirement plans.

Registered Education Savings Plan (RESP)

These accounts allow you to save for your child’s post-secondary educational costs. The money is put in after tax (no tax deduction), grows tax-deferred, and when it’s taken out, it’s taxed in the name of the child. The assumption is that when the money is taken out, little to no taxes will be paid, because the student’s deductions (e.g. personal and tuition) will offset their taxes payable. Another benefit of the account is that the government tops it up to the tune of 20 per cent of your contribution (to a maximum of $500/year, a total of $7,200 per child).

These are just three ways you’re allowed to reduce your tax bill. There are many others, some straightforward, others much more complex or geared to specific situations. Since everyone’s situation is different, you should check to see which strategies work best for you. Once you’ve minimized how much of your money goes to taxes, you can focus on who’ll spend the rest.

Keep the conversation going

Are you using any of these measures to reduce taxes, and have you consulted a professional to see if there are other available tax-saving measures that are applicable to your particular circumstances? Post a comment below.


The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Duncan Warren, CPA, CA, CFA

Duncan provides objective financial planning services to individuals.