Are you still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?
It's all about the tax. First, let's review the main features of this tax-free registered savings account:
How much can I put into my TFSA? Starting this year, you can now contribute up to $10,000 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn't a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It's also worth noting that your withdrawals won't compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.
It's a great retirement savings tool: If you've successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, within your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won't reduce your taxable income, you won't receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP.
By contrast, any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only, so you save on taxes paid for the year. People often put their income tax return into their RRSP to get a leg up on the next year as well.
If you withdraw monies from your RRSP, that will be considered income for that tax year and you will be taxed at the current rate.
Don't forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off.
If you could afford to, contributing to each year's maximums in both plans would be ideal. Of course, it comes down to finding a balance between creating a strong nest egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.
To learn more about the differences and benefits of the RRSP and TFSA, speak to your financial advisor.
Dan White is a Meaford-based Life and Health Insurance and Mutual Funds Advisor with Desjardins Financial Security Independent Network. If you have questions about financial issues that you would like Dan to write about, send him an email at: email@example.com