TFSA or RRSP : The Dilemma
So, you want to invest, but aren’t sure whether to use a TFSA (tax-free savings account) or RRSP. It’s a common dilemma. We believe that most of the time, TFSA’s are the better option. However, if your employer has a plan and will match your RRSP (or TFSA) contributions, use that excellent option first, as you will instantly double your investment, which will greatly increase the income earned in the registered plan.
Let's take a very brief look at the two registered plans. Here’s how the tax benefits compare:
There is no tax deferral.
You have already been taxed on the money you place in a TFSA. You will not receive a deduction on your taxes, but you will not be taxed when you withdraw funds from it.
Income earned in TFSA’s is not taxable.
No matter what type of TFSA you choose all of the income earned in the TFSA is tax-free. You will never pay any tax on it. Ever.
Tax is deferred.
While it is called a deduction on your taxes, the tax is really only deferred. You will pay the tax later when you withdraw funds from your RRSP.
Income earned in RRSP’s is taxable.
No matter what type of RRSP you choose all of the income earned in the RRSP will be taxed at your regular tax rate as you withdraw funds.
Both TFSA and RRSP
You can choose almost any type of investment.
Many people think that a tax-free savings account is just that – a bank savings account. However, like RRSP’s, TFSA’s can be invested in GIC’s, stocks, and many other investment vehicles.
Your invested funds can be guaranteed up to 100%.
If you are attracted to the potential return of moderate to high risk investments, but are not sure you can commit to the risk, you may want to look at segregated funds. Segregated funds are guaranteed, up to 100% of your investment. This means, that if you have invested $100,000 in high risk investments, and they crash and are worth nothing, you will still receive the $100,000 that you have invested.
How will it look when you retire?
If you and your spouse withdraw a combined $60,000 per year from your registered fund, you will pay zero tax if you are withdrawing from a TFSA, and you will pay between $14K and $18K in taxes each year, depending on how the RRSP has been split between you and your spouse. (There are a few other factors that would also affect your tax payable, and these are not taken into account in the above approximation.)
If you would like more information on investing, please contact TNT Global Accounting today to connect with a financial advisor in your area. They will be happy to meet with you at no charge and discuss your options.