How to use TFSAs and workplace pensions to maximize savings

Q: My wife and I are both in our mid 30s and both have Defined Benefit Pension Plans (DBPPs) through work. My employer pension is with OMERS and hers is through a hospital. She is a saver and puts money into a TFSA where it just sits. I, on the other hand, use the TFSA to purchase ETFs here and there and pay the trading fees. For the last few years, I’ve been doing additional voluntary contributions (AVCs) through OMERS. Last year OMERs had a net return rate of 10.3%. I put more into OMERs then the TFSA. I’m wondering if this is a good route to take or if I should be putting more into my TFSA than OMERs AVCs. I’m trying to be proactive because I realize the only people responsible for our future is us. I’m just wondering where I should be putting the bulk of our savings. We own a house and have a mortgage, car payments and some credit card debt. Any advice would be helpful.

—Jevon

A: Jevon, it’s a pleasure to hear the proactive nature of your story. You are each participating in a Defined Benefit Pension Plan with the commensurate deductions from your pay as well as wanting to find room for additional savings.

AVC’s (Additional Voluntary Contributions) are funds contributed to an RSP and invested by OMERS. This RSP is separate from the OMERS DBPP (Defined Benefit Pension Plan). It does not add to your pension entitlement. Investing with AVC’s is attractive due to the steady diversified portfolio that OMERS manages and low fees (annual administration fee of $35 plus approximately 0.6% of RSP balance). 10.3% is a satisfactory recent net return but will vary from year to year. Go here for more information.

AVCs can be sourced from an RSP or contributed from savings if you have RSP contribution room. Watch that you do not over-contribute by reviewing your Notice of Assessment from Revenue Canada. Once your contribution room is used up, AVC’s are no longer a savings option. You would wait until next year to continue.

I suggest that you and your wife should review your personal spending to ensure you are consistently paying off your high-interest consumer debt from the amounts in your regular pay cheques.

Once the two of you become credit card debt free and still manage to free up cash flow, you should look at the following—either one at a time in this order or in tandem:

• Accelerate car loan payments
• Contribute a steady amount to your AVC account at OMERS (assuming an annual salary of $50,000 to $100,000)
• Contribute $5,500 annually into each of your TFSA account as savings permits
• Top up your AVC account at OMERS to your RSP contribution limit (assuming your annual salary is $100,000+)
• Accelerate mortgage payments

While I haven’t pinpointed the savings split between AVC and TFSA savings, they do both have benefits. AVC is best suited for longer-term savings and TFSA for medium-term goals.

Imagine getting to the point where there is no longer a need for a car loan or other consumer credit. The TFSA savings is accumulating to purchase your next car and your mortgage is steadily declining. Meanwhile, the OMERS DB pension and the AVC (RSP) is nicely accumulating for retirement.

Tom Feigs is a certified financial planner with Money Coaches Canada in Calgary

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