RRSP vs. TFSA
RRSPAn RRSP is one of the most common savings vehicles used by Canadians when it comes to planning for retirement.
- Immediate tax savings as any amounts contributed in the year are deductible from your personal income. Making a large RRSP contribution can often result in a refund being received.
- Income generated by your RRSP is not taxed as long as you leave it in the RRSP fund. As such the growth of your investment over time is tax free.
- 60 days after the fifth year following the first withdrawal, or
- The second year after the last year the individual was in full time studies.
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.
TFSAA 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:
- No deduction from current income is generated when you contribute to a TFSA, and
- There are no limits on taking funds out of a TFSA, this can be done at any time and no taxes will be incurred.
RRSP vs. TFSAWhen 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