Ever since the start of the TSFA, Canadians have been struggling to pick between the country’s old registered retirement savings plan (RRSP) which is tax shelter savings product and the TFSA. Ideally, if you can make use of both the RRSP and TFSA it would be great, however only a few people can access that type of money annually. So, they have to decide which will be best for them this year, the RRSP or a TFSA?
The main difference between a TFSA and an RRSP is the tax timing. Both plans have been designed to yield the same results, assuming the tax rate is the same down the road. However for a lot of people, this isn’t the case.
Once you are 18 and old you can make contributions of up to $5,000 each year to a TFSA and invest in eligible investment vehicles or GICs and mutual funds. This plan offers tax free withdrawals and earnings. Withdrawals can be made for any reason with this plan and it will not affect your eligibility to get government income benefits like Old Age Security. The TFSA allows you to re-contribute the withdrawn funds at the start of the next calendar year as well as carrying unused room for contribution to the next year. TFSA’s contributions are not tax deductible which will allow you to generate a tax free investment income on pre-taxed contributions.
The RRSP plan offers qualified investments to earn tax-deferred compound growth. The plan’s contributions are tax-deductible and the income received from your RRSP is sheltered from tax pending withdrawal. The RRSP allows you to carry forward unused contribution room indefinitely. The plan facilitates income splitting upon retirement through a spousal RRSP prior to the age of 65 in contrast to a RRIF pension income splitting, which is only accomplished after 65 years old.