With the RRSP deadline fast approaching (Thursday, March 1^st) many people are still confused as to where to invest their savings; an RRSP or TFSA? In a perfect world investors would maximize both plans; however for most Canadians that is not an option.

The major difference between a TFSA and an RRSP is the treatment of contributions and withdrawals for tax purposes. RRSP contributions are tax-deductible, but withdrawals are taxed as earned income. On the other hand, TFSA contributions are not tax deductible, but withdrawals (including earnings & growth) are completely tax free.

Generally, an RRSP is used for saving for retirement, the main benefit being putting off paying the tax on income until a future date; usually during retirement when you earn less income and are therefore in a lower tax bracket. Investors also receive a tax deduction or ‘refund of taxes’ based on the amount they invest in their RRSP; thus making them more attractive to those in high tax brackets or people who just hate paying tax.

A TFSA can be used for both saving for retirement and other shorter-term investment needs. Because TFSA withdrawals are added back to your available TFSA contribution room in the following calendar year, there is very little downside to using TFSA savings for mid-sized to large purchases. Therefore, anyone saving outside an RRSP for a vacation or new vehicle should consider using a TFSA account for these dollars.

Both accounts carry forward unused contribution room, meaning if you don’t invest one year the allowable amount is added to the amount you can invest the following year.

The TFSA and RRSP are both important tax-advantaged savings plans sponsored by the Government of Canada. Generally, one is not better than the other; they work together to give Canadians valuable tax benefits. A TFSA can be an excellent complement to an RRSP and may be used to maximize retirement income when RRSP contribution limits have been reached.

Still Confused?

Generally speaking, if you earn over $50,000 per year, or if you are looking for immediate tax relief and long term tax-sheltered growth, the RRSP is usually the better way to go. If you have maxed out your contribution room, have a large pension growing or earn less than $30,000 a year, then a TFSA might be the better choice.

As you can appreciate determining which tax-advantage strategy best suites your needs can be difficult.  If you are still having trouble making the right choice for your situation; please don’t hesitate to give me a call, I’m happy to help.

Have a great weekend,

Tracey

 

Source: Fidelity Investments, and Manulife Solutions, Money Sense article by David Hodges, posted Feb. 6^th 2015. MT 02-22-17

Image courtesy of Sira Anamwong at FreeDigitalPhotos.net