Financial Planning
TFSA or RRSP – Choosing One?
Choosing whether to invest in a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) is easier than you think. Investing every year is the key to creating assets and a good financial future. Monthly deposits using a pre-authorized contribution plan from your bank account or payroll deductions makes saving money easy. Contribution amounts can be increased over time to keep pace with inflation and maximize the contribution limits of your TFSA or RRSP.
TFSA
The TFSA has an annual contribution limit of $6,000 for 2020, and a maximum contribution limit of $69,500 for those who were over the age of 18 in 2009. The annual contribution limit is set by the government each year, and any unused contribution room dating back to 2009 or the year you turn 18 can be carried forward. One additional benefit is that you can redeposit money into the TFSA the year following a withdrawal. The TFSA investments grows tax-free and the withdrawals are tax-free, meaning there is no income tax deduction for any deposits.
RRSP
The RRSP allows for contributions up to the annual limit as noted on your income tax assessment each year. Any unused contribution room is carried forward to future years but withdrawals are not added back to your contribution room. The RRSP investment grows tax-free like the TFSA; however, at the time of withdrawal, the full withdrawal amount is taxable. The RRSP has additional benefits, such as the Home Buyers Plan and the Lifetime Learning Plan. Each plan allows you to withdraw a set maximum amount for the purchase of your first home or for post-secondary education, respectively. The amount you withdraw is not taxable income, but it must be fully repaid back into your RRSP over time. If you do not redeposit the money, this withdrawal will be taxed to you as income over the years.
Investing
TFSAs and RRSPs are savings plans that can hold a variety of investments based on your personal risk tolerance and financial goals. Investments within a TFSA or RRSP can include GICs, mutual funds, segregated funds through a life insurance company, stocks, bonds, and Exchange-Traded Funds (ETF). TFSAs are beneficial for most Canadians and funds from a TFSA can even be transferred or moved to an RRSP in the future if tax breaks are needed. RRSPs are most beneficial for Canadians who are currently in a higher tax bracket but will be in a lower tax bracket at retirement.
Final Thoughts
In an ideal world, both TFSA and RRSP accounts are maximized to benefit your retirement and financial needs. The key thing is to start saving now with a monthly contribution that fits your budget and your financial goals. A review with your financial advisor each year will ensure that you are still on track to reach your goals. Don’t leave investing to the last minute; take steps today to secure your financial future.