What's Right For You? RRSP or TFSA?

At Aldergrove Credit Union, we’re here to help you make smart and informed investment decisions that meet your needs today, and achieve your goals into the future. We’re pleased to provide you with the following information that highlights some of the key details and differences between RRSPs and TFSAs

RRSPs (Registered Retirement Savings Plan)

RRSPs are what most Canadians are familiar with. Your RRSP is a tax-deferred investment plan designed to provide retirement income. RRSPs work very well when you contribute in a higher tax bracket and withdraw in a lower tax bracket. The amount you contribute is deducted from your income which may mean you pay less tax or receive a tax refund.

A tax refund is a wonderful thing – if you use it wisely. Contributing it to a TFSA, making an extra mortgage payment, or putting it towards your consumer debt make contributing to an RRSP worthwhile and financially savvy.

TFSAs (Tax-Free Savings Account)

The TFSA was introduced by the Canadian Government in 2009. It is meant as a savings tool that allows investment income to be earned tax-free; you don’t get a tax-deduction or refund, but you can withdraw the money from a TFSA tax-free anytime. All of us who are over 18 automatically acquire $6,000* of contribution room for the 2019 calendar year. If you withdraw you can re-contribute the amount of the withdrawal the following year with no penalty.

The Comparison

RRSPs

TFSAs

Main Purpose
  • Saving for retirement
  • Short, medium or long-term savings
  • Save on taxes as TFSA interest earned is
    non-taxable
Secondary Purpose(s)
  • Lower taxes paid on current income
  • Take advantage of Lifelong Learning Plan (LLP)
  • Take advantage of Home Buyers’ Plan (HPB)
  • Emergency funds
Maximum Annual Contribution
  • Based on income; 18% of your previous year’s earned income up to an annual maximum
  • Reduced by any company-sponsored pension plan contributions
  • $6,000* for the 2019 calendar year for everyone over 18 (total contribution limits from the introduction of Tax Free Saving Accounts in 2009 through 2019 should not exceed $63,500)
Do you require “earned income” to contribute?
  • Yes
  • No
At what age can you start contributing, and at what age must you stop contributing?
  • Start: no limit
  • End: age 71 (at which time the RRSP must be cashed out and included as income or converted into an RRIF, annuity, or other eligible savings vehicle)
  • Start: age 18
  • End: no limit
Are your contributions tax deductible?
  • Yes
  • No
Are your savings taxed?
  • Yes, but taxes are deferred until you withdraw funds (and will typically be in a lower tax bracket)
  • No, contributions and income earned are tax-free when withdrawn
Can you withdraw funds any time without a penalty, provided money is available?
  • Withdrawals made before age 71 (except per the LLP or HBP programs) are subject to a withholding tax that depends on the amount withdrawn
  • Yes
How do my withdrawals affect my contribution room?
  • Withdrawals do not create any new contribution room
  • Contribution room is lost
  • Any new contribution room due to a withdrawal is carried forward into the next year(s)
Can I carry forward unused contribution room?
  • Yes, unused contribution room carried forward until age 71
  • Yes, unused contribution room carried forward indefinitely
Does the amount of savings affect your eligibility for income-related government benefits (e.g. OAS)?
  • Yes, withdrawn amounts (which are considered income) could affect eligibility
  • No
What happens if you over-contribute?
  • Penalty of 1% per month on excess contributions if exceeding the $2,000 lifetime over-contribution amount
  • Penalty of 1% per month on excess contributions
Is there a spousal plan?
  • Yes, you can directly contribute to a Spousal RSP
  • No, but you can loan funds to your spouse to top-up his or her savings

Is a RRSP or TFSA Right For Me?

Selecting a savings plan depends solely on your situation and goals. Both are great tools for saving, so you can’t go wrong. Following are some scenarios to help you understand how each of these savings plans can be leveraged and help you identify the plan or the combination that’s right for you.

RRSP

V.S.

TFSA

For first time home buyers, you may be able to borrow up to $25,000 per person from your RRSP (Home Buyer’s Plan) however the borrowed amount must be paid back over 15 years.

If the yearly repayment is not made then it must be included as taxable income on that year's tax return.

Real Estate Purchase

You can withdraw money from your TFSA at any time and
re-contribute the following year.

Withdrawals are tax-free.

You can use up to $10,000 per year (up to a maximum of $20,000) towards education costs, however the amount must be paid back over 10 years.

Withdrawals are tax-free if used for education purposes.

Education

Provides additional education savings beyond your Registered Education Savings Plan.

Withdrawals are tax-free.

RRSP is the most popular retirement savings method, because your contributions are deducted from your taxable income, and the return on your investment is reinvested into your tax-sheltered plan.

Retirement Planning

Provides additional savings beyond your RRSP.
It is not recommended to be a form of savings for discretionary items, like vacations as RRSP’s are intended to help you save for retirement.

Vacation

Great way to save for big ticket items like a vacation, a car, a home entertainment system, etc., because withdrawals are flexible and tax-free.

*This information is intended to to a guideline only and does not intend to replace the information from Revenue Canada. To see the yearly TFSA dollar limit click here.

Contact your local branch today, and together we’ll develop a plan that fits your saving and investing needs. We’re here to help!
 
Talk to us today to learn more!

 

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