The question that most Canadians are thinking over is should they be using Tax Free Savings Account (TFAS) instead of Registered Retirement Savings Plans (RRSP) to save for their retirement? The honest response is there is no definite answer for that question as the answer will be based on your current circumstances. Both the RRSP and TFSA are designed to help Canadians save for their retirement.
RRSP has always been the go-to retirement solution for many Canadians, and offers some attractive advantages. The RRSP allows you to earn tax-sheltered growth on assets and earnings which are held in the plan while your contributions are helping to reduce your taxable income. Your RRSP is also accessible for other purposes outside retirement. You can also withdraw some of the funds tax-free if it is for post-secondary education or towards the purchase of your first home.
TFSA on the other hand offers investors a highly flexible savings medium with basically an unlimited amount of practical applications. TFSA investment is effective for practically any purpose. The plan’s higher liquidity and lower annual contribution limit might make it more valuable for some as a short-term option like saving for emergency reasons or towards major purchase and the funds can be withdrawn at anytime without tax issues.
However if you are closer to retirement or will retire and receive a reduced income and taxation level you should think about making RRSP a priority. You can always use any funds left over after making your RRSP contribution and put it in a TFSA account.
When investing in any of these plans you must also consider the importance of liquidity when you are weighing your options. This means you will have to examine your goals and financial needs to determine how much liquidity you need as the tax penalty of early RRSP withdrawals. You can work with a financial advisor to assist you in matching your investment to your goals and create a financial strategy for the long-term.