RRSP vs. TFSA

Both a Registered Retirement Savings Plan (RRSP) and a Tax Free Savings Account (TFSA) are very useful tax efficient investment tools that exist in Canada. The Canadian Revenue Agency (CRA) has created unique tax rules for each tool to encourage Canadian residents to save for their future. This article will help provide you with a clear understanding of the pros and cons of each, and which you would likely fund first when considering an RRSP vs. a TFSA.

RRSP

An RRSP is one of the most common savings vehicles used by Canadians when it comes to planning for retirement.
There are two key benefits provided by RRSP's:Taxes are paid when you withdraw funds from your RRSP, though as it is intended to be done in retirement your income overall is often lower and as a result the taxes paid are lower. People can withdraw funds from their RRSP at any time even before retirement, but there will be taxes due. One exception is that up to $25,000 can be withdrawn to purchase your first home, though this qualifies as a loan from your RRSP and you have to pay it back within 15 years. Up to $20,000 (capped at $10,000 a year) can also be taken out if an individual is returning to post-secondary education. This would have to be paid back the earliest of:There is a limit on how much can be contributed to an RRSP in a given year, 18% of your income up to a maximum threshold that changes each year ($24,930 in 2015).

A final consideration is that in addition to an individual RRSP it is possible to set-up spousal RRSPs so that spouses can contribute jointly. Additionally there are Group and Pooled RRSPs available to be shared among individuals working at the same company.

TFSA

A TFSA is a relatively new tool created in 2009 that allows individuals to contribute $5,000 for each year from 2009 to 2012, and $5,500 for following years into an account where any income generated is tax free. The contribution limits are cumulative and carry over if not used during the year. The key differences from an RRSP include:When funds are withdrawn from a TFSA the amount withdrawn is added to your contribution limit, so those funds can be re-contributed later.

RRSP vs. TFSA

When choosing how to allocate your funds it's often a good idea to use a combination of the two, balanced on your needs. If it's important that you can access your invested funds quickly and easily should you need them, the TFSA will be a better option as you can do this with no tax ramifications. If the immediate cash back incentive of a RRSP deduction on your taxes is more important and you don't see needing the funds soon, then an RRSP is likely a better route. The best option is to contribute to both if you can, so you get cash back and lock in funds for your future but also have some funds immediately available if you need them.
By Jeffrey Glen

Copyrighted 2016. Content published with author's permission.

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