Should I Invest in my TFSA or RRSP?

By Bonnie Sainsbury | Investments

When you start thinking about your retirement, you need to consider what vehicle to use for that retirement. You can obviously use more than one vehicle too. We’re talking about whether you should use a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Before you do anything, you should talk to your financial planner.
Tax-Free Savings Account (TFSA)
What is a TFSA?
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 (SIN) 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income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.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. 
Pros
• This is a savings account where you can invest in any type of investment you want, depending on your risk tolerance level.
• Withdrawals will be added to your TFSA contribution room at the beginning of the following year.
• You can replace the amount of the withdrawal in the same year only if you have available TFSA contribution room.
• On your death, the TFSA is disbanded and any earnings after your death are taxed, or transferred to your spouse
Cons
• Your contribution limit only goes up by $5,500 per year.
• Direct transfers must be completed by your financial institution.
• A tax applies to all contributions exceeding your TFSA contribution room.
A TFSA is a great way to save for retirement. Especially if you ever need to withdraw the funds to cover something, you can put it back when you have the funds, and the contribution room. However, if you need a tax deduction, then it may not be the way to go.
Registered Retirement Savings Plan (RRSP)
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 if the funds remain in the plan; you generally must pay tax when you receive payments from the plan.
Pros
• You can contribute up to your limit every year, and get that amount taken off your current income, no matter what that income.
• You accumulate your contribution amount every year that you don’t use it.
• You can go up to $2,000 over your contribution limit without being taxed on that over contribution.
• You can contribute to a RRSP for your spouse, and claim the deduction, and any withdrawals are taxed as that spouses’ income.
• You can invest in bonds, mutual funds, or securities (listed on a designated stock exchange).
Cons
• Only employment (T4) income is used to calculate your contribution limit every year.
• Any other pension contribution is applied against your contribution limit, thereby reducing what you can contribute yourself.
• You are taxed on any contributions that go more than $2,000 over your contribution limit.
A RRSP is a great way to save for your retirement, and get a deduction off your income for tax purposes. However, you do need to have the income in order to grow your contribution room, and the funds in order to contribute.
A good plan is to get in touch with a financial planner who can help you come up with a retirement plan, and how you can invest your funds into a RRSP or a TFSA. Or, maybe both. You need to know your contribution levels before you talk to a financial planner. You can do that via My Account. If you don’t have that yet, then sign up for it here.

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