Which savings option is best for you: an RRSP or a TFSA?

When it comes to saving for retirement or any other financial goal, there are a lot of options available to you. Two of the most popular options in Canada are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Both have their own benefits and drawbacks, so which one is the best choice for you? Let’s take a closer look.

Contributions to an RRSP are tax deductible, which means that you can deduct the amount you contribute from your income when you file your taxes. This lowers your taxable income, which in turn lowers the amount of taxes you owe. For example, let’s say you earn $50,000 per year and contribute $5,000 to your RRSP. When you file your taxes, you will only be taxed on $45,000 of income instead of the full $50,000.

The money in your RRSP can grow tax-free until you withdraw it in retirement. When you do withdraw the money, it will be taxed as income. The idea behind an RRSP is that you will be in a lower tax bracket when you retire than you are during your working years, so you will end up paying less in taxes overall.

You can contribute up to 18% of your previous year’s income to an RRSP, up to a maximum contribution limit set by the government each year. For 2020, that limit is $27,230.

Tim’s Tips: Leverage your tax returns. Most people look at a tax return as a bonus, or extra income. Instead, dedicate them back to your RRSP’s. This ensures you reach your retirement goals quicker.

Unlike an RRSP, contributions to a TFSA are not tax deductible. However, any money that you earn in your TFSA (such as interest on investments or capital gains) is tax-free. You can also withdraw money from your TFSA at any time without incurring any penalties.

The main advantage of a TFSA over an RRSP is that you don’t have to pay taxes on withdrawals in retirement. With an RRSP, withdrawals are considered taxable income. This means that if you’re in a lower tax bracket when you retire than you were during your working years, a TFSA could end up being more beneficial than an RRSP.

The annual contribution limit for a TFSA is set by the government each year and is based on inflation and changes in the average wage. For 2020, the limit is $6,000.

Tim’s Tips: Max out your TFSA first. If you’re in a lower tax bracket, it will be better at helping you build capital. You can even transfer your TFSA Savings over to an RRSP later if you’re looking for tax breaks.

There’s no easy answer when it comes to deciding whether an RRSP or a TFSA is better for you. It depends on factors such as your current marginal tax rate, what tax bracket you think you’ll be in when you retire, and whether you need access to your savings before retirement age. However, if you’re trying to decide between the two options, our advice would be to start with a TFSA and then max out your contribution room before turning to an RRSP.

Do you need help with your investments? Contact us for expert opinions and thoughtful consultation towards your brighter financial future.


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