TFSA or RRSP (and what are they, anyways?)

 

What is a TFSA?

 

What is an RRSP?

 

Which is better???

 

Let me help define and dissect Canada's two most popular registered investment vehicles. 

 

An RRSP as defined by the Canada Revenue Agency:

 

 “An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.” (source: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html)

 

So…

  • A Savings plan

  • Registered with the Government/Canada Revenue Agency

  • Contributions can be used to reduce tax

  • Income grows within plan tax-free until funds are withdrawn

  • Restrictions on contribution limits – once you withdraw funds you cannot re-contribute (unless using a program like the Home Buyers Plan)

 

A TFSA as defined by the Canada Revenue Agency:

 

 “The Tax-Free Savings Account (TFSA) program began in 2009. It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.  Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible.” (source: http://www.cra-arc.gc.ca/tfsa/ )

 

So...

  • A savings plan

  • Registered with the Government/Canada Revenue Agency

  • Contributions are NOT used to reduce tax

  • Income grows tax-free

  • Funds can be withdrawn tax-free

  • Restrictions on contributions (typically $5,500/year)

  • Can withdraw and re-contribute funds (some restrictions according to the tax year – ie: you contribute $5,500 in January 2017, you withdraw $3,000 in July 2017, but before you can put back the $3,000 you withdrew you must wait until the following calendar year, 2018)

 

Which is better? 

 

Well…it depends. There really is no cut-and-dried answer.

 

Typically, if you are in a higher marginal tax-bracket (higher income) the RRSP will provide more of an advantage when compared to the TFSA. 

 

A Spousal RRSP may be beneficial if there is one partner who earns significantly more than the other. 

 

A TFSA, although it provides flexibility, may not make the most sense when it comes to retirement savings if the money is easily accessible (and therefore easy to spend).

 

If you need an answer regarding which savings tool is the better choice for you, I recommend talking to an advisor who can review YOUR situation and develop a customized plan suited to your needs.

 

A final note from Dave Chilton, aka The Wealthy Barber, "(1) If you go the RRSP route, don’t spend your refund; (2) If you go the TFSA route, don’t spend your TFSA; (3) Whatever route you go, save more!”

 

I also recommend this article, an excerpt from Dave Chilton’s book The Wealthy Barber Returns: Significantly Older and Marginally Wiser, Dave Chilton Offers His Unique Perspectives on the World of Money By David Chilton. Copyright © 2011 by David Barr Chilton, released September 2011.

 

 Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.

 

Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.

 

 

 

 

 

 

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