Both registered retirement savings plan (RRSP) and tax-free savings accounts (TFSAs) offer a significant range of benefits when it comes to saving for retirement.
TFSAs :
TFSAs are registered accounts that offers tax free gains as well as withdrawals. However, contributions to a TFSA are not tax-deductible. Some of the benefits of a TFSA are:
- withdraw at any time without penalty
- You can make a withdrawal at any time without affecting any government benefits.
- The amounts you withdraw are not considered part of your income.
- There is no age limit for contributing.
- Contribution is not dependent on your income or your tax return.
- If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.
RRSPs
RRSP is also a registered account purpose of accumulating retirement income. The amounts you contribute are deducted from your taxable income, which may entitle you to a tax refund. However, during withdrawals it is taxed at marginal rate.
- RRSPs are especially beneficial for Canadians in a high tax bracket.
- The interest generated by your investments is not taxable provided it remains within your RRSP.
- You may contribute up to 18% of your eligible earnings or the maximum allowed by the government.
- If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.
- If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.
RRSP Withdrawals: You may withdraw money from your RRSP however it will count as income and you will be taxed on the amount at a higher tax rate plus a withholding tax. You will also permanently lose the contribution room you used to originally make your deposit. However, if you use RRSP to buy a new property under the Home Buyers’ Plan (HBP) or for school fees, taking advantage of the Lifelong Learning Plan (LLP) you will not be charged.
RRSP must be converted to a Registered Retirement Income Fund (RRIF) by Dec 31 of the year you turn 71.
RRSP or TFSA?
TFSA or RRSP both are great plans. It truly depends on your financial goals, needs and your income. Withdrawals from TFSAs are always tax-free, whether you are working or retired. Withdrawals from RRSPs are always taxable.
You can also combine the two and use your RRSP for your main retirement income, while keeping some money in a TFSA to cover any unexpected expenses without affecting your taxable income.
RRSP, TFSA or both? Need help deciding?
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