By: Dr. Tyler Hunter
Now that you have survived 10+ years of education and are finally making a reliable salary the next challenge is what to do with your money. With the lack of a pension and earnings starting later in life than most career paths, physicians need to save efficiently for retirement.
The three types of accounts that can be used for investing and are available to every physician are the: tax-free savings account (TFSA), registered retirement savings plan (RRSP) and a margin account (either personally or within your corporation). All these accounts can be opened at any of Canada’s five major banks or an online brokerage such as Questrade.
As implied by the name, in a tax-free savings account you do not have to pay taxes on capital gains, interest, or dividends. Regardless of how much money was put in, you can withdraw any amount at any time. It is also a flexible account as you can take money out whenever you need it. This allows the account to be used to save for other financial goals other than retirement. Many consider this registered account to be poorly named as the account should not be used as a savings account at all. The downside of this account is you have already paid taxes on all contributions. For 2022, the contribution limit is $6,000. You can find past/total contribution limits by logging into your CRA account or by doing some math after following this link.
This account allows the physician to defer taxes until they withdraw the funds in retirement. Capital gains, interest, and dividends are not taxed while inside the account but instead, you pay taxes on the amount you withdraw later in life. Tax-free growth makes a big difference over the course of a career. Contributions to the RRSP are not taxed and therefore reduce your taxes in the year you contribute or in future years. This means that if you earn $100,000 and contribute $18,000 in the same year your taxable income is $82,000. The maximum allowable contribution yearly is 18% of earned income up to $27,830 in 2021. The contribution limit does change from year to year somewhat in sync with inflation. As above, the best place to check your current RRSP limit is the myCRA web app (www.canada.ca for more e-services) or ask your accountant to calculate it for you. It should be noted the RRSP is less flexible than the TFSA. An RRSP can only be used to save for retirement and there are penalties for withdrawing money prior to this.
Most commonly it is advised that the above registered accounts should be filled to the maximum allowed and debt (student loans and line of credit, not mortgage debt) should be paid off prior to incorporating. If one does decide to incorporate it opens another avenue to save for retirement. This allows the physician to invest money they don’t need for expenses (under the corporation’s name) with larger dollar amounts due to tax saved. In turn, this allows greater long-term returns via compounding. Tax integration with a corporation is complicated and is beyond the scope of this post, however, in the simplest terms corporation tax rates in Alberta are 8%. The effective personal tax rate for a physician earning $250,000 and maximizing RRSP room is 32%. Again, with oversimplification, this means if you leave the money in your corporation and invest it there rather than personally in a non-registered account you have paid 24% less tax and have a larger starting amount. The corporation account is otherwise not shielded from taxation and your corporation must pay taxes on all capital gains and dividends.
If you decide not to incorporate you can always open what is called a margin or non-registered investing account. However, if you have excess funds earmarked for retirement that you want to invest it would make much more sense from a tax perspective to incorporate and invest via the professional corporation.
Depending on a physician’s personal situation there are two other types of investing/savings accounts available. If you have children, you may want to consider opening and investing in a registered education savings plan (RESP). If you have never purchased a house and want to save for one there is a brand new account called the First Home Savings Account (FHSA).
The above is only the tip of the iceberg to get people started here are some recommended resources that I have found very helpful if you want to keep learning.
- Physician Financial Independence group on Facebook – answer the questions that prove you are a physician, and the moderators will add you.
- Loonie Doctor – the website has more advanced info about what you might consider investing in, how to decrease your tax bill and several calculation engines that can simulate your specific financial situation.
- Beat the Bank: The Canadian Guide to Simply Successful Investing by Larry Bates – very straightforward and start from basics read on how to practice evidence based investing and how to avoid being taken advantage of by financial advisors/the bank.
- Millionaire Teacher: The Nine Rules You Should Have Learned In School by Andrew Hallam – investing and savings basics
- There will be a follow up post by myself about evidence-based investing strategies mainly focussing on DIY investing and passive ETF portfolios, essentially what should you buy in the above accounts…. stay tuned!