The TFSA vs RRSP Debate
There is an ongoing debate around the benefits of saving in a Tax-Free Savings Account, (TFSA) versus a Registered Retirement Savings Plan, (RRSP). The TFSA and the RRSP provide several options for building wealth and planning for the future. However, it is important to recognize that the journey to wealth accumulation begins with implementing either of these strategies at an early stage.
Tax Free Savings Account (TFSA)
A TFSA is a vehicle for growing income with the benefit of not paying taxes when depositing or withdrawing your money. This exceptional benefit was implemented by the Government in 2009.
Benefits of a TFSA:
Provides a means to take advantage of short-term savings goals.
Assists in accumulating additional retirement savings after contribution limits have been reached in an RRSP.
May be used as a savings vehicle for child’s/children’s education when the tax benefit of a RESP (Registered Education Savings Plan) has been exhausted.
Registered Retirement Savings Plan (RRSP)
An RRSP provides an excellent opportunity to plan for retirement as it allows money to grow tax deferred. Simply put, you are not taxed on your money until you are ready to use it. By way of example: earnings of $100,000 per annum and a contribution to an RRSP at 18% (or $18,000), means that your taxable income for the year would be $82,000. Considering the tax deduction, income tax levied at 40% could result in a tax return after filing of approximately $7,200. It is important to note that any taxes that are not paid at the outset are considered deferred taxes and, as a result, a tax deduction would be applied at the time that funds are withdrawn in the future.
It is anticipated that annual income needs would decrease in retirement years, therefore an RRSP could provide a direct tax savings. During working years, an RRSP is advantageous if there is an opportunity to lower your income tax bracket. When considering retirement planning strategies, it would be sensible to consider companies that offer retirement plans and have match contributions.
Benefits of an RRSP:
If saving for retirement with an estimated annual income of $50,000 - $55,000 or $100,000 - $115,000 utilizing this plan would assist in capitalizing on contributions.
The First Time Home Buyers Plan provides a level of comfort for first time home purchasers.
The Lifelong Learning Plan is extremely useful for individuals who are pursuing further education options.
In conclusion, there is no right or wrong answer to the question of “which option is best?”. The TFSA and the RRSP serve multiple purposes and both are dependent upon individual future goals.
It is highly recommended that a discussion take place with an experienced financial planner who can provide guidance on the TFSA and the RRSP to ensure that any personal and/or family financial goals are appropriately met.