One or both, which is right for you?
RRSPs
RRSPs are what most Canadians are familiar with. Your RRSP is a tax-deferred investment plan designed to provide retirement income. RRSPs work very well when you contribute in a higher tax bracket and withdraw in a lower tax bracket. The amount you contribute is deducted from your income which may mean a tax refund for you. A tax refund is a wonderful thing – if you use it correctly. Contributing it to a TFSA, making an extra mortgage payment, or putting it towards your consumer debt make contributing to an RRSP worthwhile and financially savvy.
TFSAs
The TFSA was introduced by the Canadian Government in 2009. It is meant as a savings tool; you don’t get a tax deduction or refund, but you can withdraw the money from a TFSA tax free anytime. All of us who are over 18, automatically acquire $6,000 of contribution every year (indexed with inflation). If you withdraw you can re-contribute the amount of the withdrawal the following year with no penalty.
So… which is better?
It depends solely on your situation. If you are in a lower income tax bracket now, a TFSA may be best suited for your needs as you could potentially find yourself in a higher tax bracket when making withdrawals in retirement.
If you anticipate your tax bracket will increase over time with your income, you may want to consider contributing to a TFSA now while accumulating RRSP contribution room for use in the future.
If you are in a position to utilize both RRSPs and TFSAs, you can’t go wrong by maximizing both of these plan types before looking for alternative investment plan options.
Let's Compare:
RRSP |
TFSA |
|
|---|---|---|
Annual contribution room |
Based on income; 18% of your previous year’s earned income up to an annual maximum. |
$6,000 in 2020 for everyone over 18* |
Carry forward unused room? |
Yes, until you’re 71 |
Yes, indefinitely |
Penalized for extra contribution |
Yes – 1% monthly |
Yes – 1% monthly |
Tax deductible? |
Yes |
No |
Tax implication |
Contributions are made with pretax dollars which grow tax-deffered until withdrawn. |
Contributions are made with aſter-tax dollars which grow tax-free. Contributions and growth are tax-free when withdrawn. |
Withdrawal |
Contribution room is lost |
Can re-contribute following year or carry forward indefinitely |
Are income-tested benefits & credits (OAS, GIS, etc.) effected by withdrawals? |
Yes |
No |
Minimum age to contribute |
Any age |
18 |
Maximum age to contribute |
End of your 71st year |
No maximum age |
Earned income needed to contribute? |
Yes |
No |
Can be used as collateral for a loan? |
No |
Yes |
One last tidbit…
TFSAs are a wonderful addition to a savings toolkit and offer many great benefits, one of which is flexibility. Here we’ve looked at it as an alternative retirement income savings choice, however it’s not limited to retirement uses. No one will penalize you for cashing in your TFSA – ever – not now, not in retirement. Nice, right? Just keep in mind it can be hard to not raid an open cookie jar, so it’s oſten very smart to not put all your cookies in the same jar.
As you can see, there’s a lot to consider on what type of plan will be right for you. Your Libro Coach is always ready to help you figure it out.
Ready to make your first deposit?
Meet with a Coach to ask questions, or start a pre-approval. Libro will require information about your current financial situation for a pre-approval, including:
- Income
- Outstanding debts, such as personal loans, student loans, credit cards, etc.
- Monthly expenses