Of course, there are differences between investing in a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). The main difference is how they are taxed. TFSA contributions are made with after-tax money and the funds can be withdrawn at any time tax-free. RRSPs are focused on retirement, as the name suggests. You get an immediate tax deduction for your RRSP contributions as well as long-term tax-deferred growth, but you are taxed when you withdraw from your RRSP, usually in your retirement years.
In some ways, its less important which savings vehicle you choose, as long as you are making regular contributions. Many people choose to wait until the RRSP deadline before making lump-sum contributions to either plan, and while that’s certainly better than forgetting to contribute, regular contributions on a monthly basis are more efficient.
Most investment experts agree that the RRSP is the best retirement savings strategy for most Canadians. To get the most in immediate tax savings and long-term growth from your RRSP, always make your maximum contribution each year. Your RRSP contribution limit for 2018 is 18% of the earned income you reported on your 2017 tax return, up to a maximum of $26,230. For 2017, the upper limit was $26,010. If you are a member of a Registered Pension Plan or Deferred Profit Sharing Plan, your RRSP contribution limit is reduced by the past year’s contributions to those plans. (How much you can contribute this year can be found on your most recent notice of assessment from the Canada Revenue Agency.)
TFSAs are an excellent way to invest your money and get your cash back at any time and for any purpose. With a TFSA, there is no tax deduction for your contributions, but all TFSA investment earnings are tax-free and will not trigger clawbacks on federal tax credits or benefits programs (such as the Guaranteed Income Supplement, Old Age Security, Age Credit, GST Credit, or Canada Child Benefit). The current annual maximum TFSA contribution is $5,500 plus the full amount of any previous year withdrawals. If you don’t use all your TFSA contribution room right away, it accumulates year after year. Fill it up any time you want if you have extra cash on hand. And your TFSA contributions do not affect your RRSP contribution room.
Regular contributions to an RRSP and a TFSA can be the key to a strong financial future. Your financial advisor can guide you on which vehicle is best for you, depending on your age, financials goals and current financial holdings. It’s all part of your financial plan, something else you should be discussing with your advisor.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.