Face-off! RRSP vs TFSA

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Product Advantages Disadvantages Considerations

 

Registered Retirement Savings Plan (RRSP)
  • Historically the most popular retirement savings tool
  • Lowers income tax payable (often provides an income tax refund)
  • Eligible amounts are accumulative • While funds remain in RRSP they are completely tax sheltered
  • When invested carefully they provide a retirement income “nest egg”
  • Can be set up as an “automatic monthly payment” or lump sums
  • Group Plans through work
  • Lump sums may be contributed until March 1st to count on previous year’s taxes
  • Better value after a certain level of income (over $40,000)
  • ‘Forced retirement savings’ (cannot be accessed without penalty)
  • Contributions levels higher than TFSA (18% of your earned income up to $25,370 for 2016)
  • Can be invested in mutual funds, segregated funds, GICs, Stocks, Bonds, Daily Savings Interest Account
  • Clients may overlook the benefits of the TFSA
  • Taxes are paid when funds are withdrawn based on current income tax rate
  • Amounts withdrawn are lost – no chance to ‘re-pay the money’
  • MYTH: once retired – income lower so RRSP taxed at lower rate of income – MAYBE NOT!
  • Only keeps up with TFSA if you’re ‘grossing-up’ every single year.
  • Amounts withdrawn prior to retirement are added to taxable income for that year
  • Tax refunds are considered a “windfall”
  • Most people tend to spend their refund instead of adding it to their investments
  • Must be aware of “claw-back’ programs that could kick in at retirement
  • Most often a combination of both RRSP and TFSA are the best option
  • When would you like to retire?
  • What will be the marginal tax rate vs. the tax rate today?
  • Will you continue to work part-time, or consult?
  • A Professional Planner can assess the best way to take advantage of lower tax rates
  • Planners can help avoid or lessen ‘claw-backs’
  • Once retired the following ‘hit’ your tax page (leading to potentially higher taxable income level):
    • CPP
    • OAS
    • RRIF
    • Rental income
    • Investment income
    • These could actually put you in a higher tax bracket than when you were working
  • Tax refunds should not be considered a ‘windfall’ for spending; but the present value of a future tax payment to be made when funds are withdrawn – therefore they should be re-invested.

 

Tax-free Savings Account (TFSA)
  • Grown in popularity since being introduced in 2009
  • Contributions paid in ‘after-tax’ dollars so can be withdrawn tax-free’ any time
  • Eligible amounts are cumulative
  • Funds inside a TFSA can be invested in GICs, mutual funds, stocks, bonds etc.
  • No penalty from CRA for early withdrawal
  • Withdrawn amounts will automatically be added to your TFSA contributions room the following year
  • Since TFSA withdrawals are tax-free, they are not included in ‘net income’ so do not negatively impact federal Government tax credits and benefits.
  • Multiple contributions can be made throughout the year including monthly ‘automatic’ contributions up to maximum limit
  • Great vehicle for long term tax control and investments
  • Current 2017 limit of $5,500 contributions
  • Easy access to money
  • Must be at least 18 years old with a valid Social Insurance Number
  • Must be a resident of Canada (Non-residents are subject to tax)
  • $5,500 invested each year for 35 years (at 6% rate of return) grows to $500,000…realizing a lower tax rate than an RRSP.
  • Current total maximum contribution per person is $52,000 in 2017