TFSA vs RRSP

TFSA, RRSP, GIC, RESP – when it comes to investing, there are no shortages of acronyms. There is no also no shortage of confusion. Should you be maximizing your Registered Retirement Savings Plan, watching the ups and downs of the TSE, jumping into the ATHEX in case things make a dramatic turnaround, all the while judging your ABC through ABM? Thankfully, unless your job is an investment advisor, you only need to know about the investment strategies that impact you; and two of the most trusted investment strategies are the TFSA and RRSP.

What are these things?

TFSA stands for Tax Free Savings Account and RRSP stands for registered retirement savings plan. Both are ways to save money.

Why do I need one?

Savings are a necessity so you don’t live one emergency away from financial ruin, and also so you can retire in comfort. Failure to save is like failing to plan. The money you need for your future is not there unless you secure it. Winning the lottery or marrying rich is not a viable plan. Putting money into an account where it can earn interest and/or work out to your advantage for taxes is a realistic and attainable alternative.

What’s the difference?

A TFSA is very flexible. Investment income and withdrawals from your TFSA are tax free. The annual contribution you can make to a TFSA is rising to $10,000 this year. TFSAs do not affect your ability to collect Old Age Security, Guaranteed Income Supplement or the Canadian Child Tax Benefit. TFSAs can be transferred to a spouse or common law partner as a death benefit (conditions apply). Contributions to a TFSA are not tax deductible.

RRSPs are an investment-based savings portfolio and can include a wide range of investments, including treasury bills, GICs, mutual funds and equities. Your contributions are tax deductible and the investment grows tax free. Tax is withheld on money withdrawn before retirement.

Which one is best for me?

The answer is, it depends. Your age, lifestyle, financial needs and retirement goals all play a role in determining which savings method works best for your needs.

Since your RRSP contributions are tax deductible and the investment grows tax free, higher income earners can benefit from this strategy – that is, if your income bracket drops when you are ready to access the funds. Since retires are typically in a lower income bracket when they are ready to benefit from their RRSPs, those looking for tax sheltered growth on high, regular contributions should check out this option.

Those in a lower income bracket or in need of more access and flexibility to their money should look at TFSAs. You may find yourself in need of cash for a down payment, medical bills or just a place to park money for a vacation. Since the money you withdraw before retirement is not taxed, this can be a great place to park your funds. However, you do not get to claim your contributions.

There is another option. Have both. Use the RRSP as a place to save for retirement and the TFSA as a place to hold money for shorter term goals, such as a down payment or vacation.

Learn more

Whichever method you choose, you should be saving. This can seem difficult when you have financial obligations and debt, but it is not impossible. Talk to a financial advisor about your options and which savings method is best for you.

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