Words Deborah Reid, Raymond James Ltd.
The financial industry is filled with acronyms and assumptions, and when a young man recently shared that he didn’t understand his retirement savings options, it became obvious that the best place to start is with the basics.
If you are one of the fortunate workers that contributes to a pension through an employer, then it goes without saying that you want to take that opportunity. Company pensions are typically offered as “defined contributions,” where both the employer and the employee contribute, whereas government pensions are considered “defined-benefit” plans.
A defined contribution plan is a retirement savings plan where you and/or your employer contribute a set amount into an individual investment account, with the final retirement payout depending on total contributions plus investment earnings, placing the investment risk on the employee. A defined benefit plan is an employer-sponsored pension that promises a specific, predictable retirement income, calculated by a formula based on salary and years of service, guaranteeing a set monthly payment for life, with the employer managing investments and bearing the risk, unlike a defined contribution plan where retirement income depends on investment performance.
Not all workers are fortunate to have an employer-based pension, but they do have the ability to contribute to a registered retirement savings plan (RRSP) as well as a tax-free savings plan (TFSA). RRSPs were originally designed for workers and business owners who did not have access to a company pension plan; however, over the years even those who have company pensions make contributions to an RRSP to increase their pension income.
RRSPs allow contributors to grow their investments without paying tax on the growth or income earned on the investments until money is withdrawn. The main advantage of making contributions to an RRSP is the tax savings during a worker’s high-income earning years. The intent is that money isn’t withdrawn from the RRSP until the contributor leaves the workforce and earns less, resulting in less taxes. An RRSP can be invested in various investments such as GICs, bonds, mutual funds, exchange traded funds, or individual stocks. The future value of the RRSP depends on the amount of money contributed, the various investments, and its rate of return.
TFSAs are considered the most valuable saving vehicle available to Canadians. It allows Canadian residents who are 18 years and older to contribute a set amount annually. As of January 2026, the maximum allowable contribution is $109,000. As with the RRSP, a variety of investments can be purchased in a TFSA. The only disadvantage of a TFSA when compared to an RRSP, is that TFSA contributions are not tax-deductible, but the major advantage is that income and growth in a TFSA are never taxable when withdrawn.
It’s always best to ask for professional advice to help with your retirement planning.
Raymond James Ltd., Member- Canadian Protection Fund.
