TFSA, RRSP — or Both?
While there’s a lot of discussion about whether the TFSA or the RRSP is better, it can actually pay off to simply have both. That’s because each account type has unique benefits, which, when utilized properly, can actually complement the other. Both the TFSA and the RRSP involve financial strategies designed to save you money on taxes and help grow your investment. But they have significant differences as to how and when that’s achieved. And the more you know about these features, the more likely you are to have a financial strategy in place that is productive and rewarding.
The TFSA
The Tax-Free Savings Account, or the TFSA, is a savings and investment account that lets you contribute and withdraw funds tax-free at any time. It’s a great starting point particularly if you’re young or have lower marginal tax rates based on your income bracket. The TFSA offers the flexibility of withdrawing your money any time without tax consequences. But unlike the RRSP, you won’t get tax deductions on any contributions made. Because the RRSP has tax costs on withdrawals, many financial advisors recommend getting a TFSA if you are unsure about your financial strategy for retirement.
The RRSP
The Registered Retirement Savings Plan, or the RRSP, gives you tax deductions based on your marginal tax rates — but your withdrawals are also taxed in the same respect. With the RRSP, you have to weigh your tax deduction amount when contributing against the tax costs of withdrawal, with the difference being your income bracket at any given time. For this reason, the RRSP works great as a retirement fund for individuals in the medium or upper tax brackets who can expect to have lower income after retirement.
TFSA and RRSP at the Same Time
Depending on your income and future goals, a great option may be to have both. Because the RRSP offers tax deduction benefits, you can fully-leverage those savings by transferring them right into a TFSA investment. This allows you to deploy your tax deduction capital while growing both accounts simultaneously — one being a retirement fund, and the other a liquid account. This option offers flexibility you can’t get with a RRSP alone, and it lets you utilize tax deductions in a way that isn’t possible with just a TFSA.
The deadline for making contributions to your RRSP is Ma?r?ch 1, 20?21. The 20?20 RRSP dollar limit is $27,230*, while the limit for 2021 is $27,830. It is always a good practice to verify your exact contribution limit. You can do this by reviewing your 2019 Notice of Assessment.
The TFSA dollar limit for 2021 remains unchanged at $6,000. If you have yet to contribute to a TFSA, you will have $75,500 in contribution room assuming you have been a resident in Canada and over age 18 since 2009 (the year TFSAs came into effect).
Of course, your strategy should always be personalized to your financial situation and goals. Get in touch to discuss how the TFSA and RRSP apply to you, and if one, the other, or both are the best decision for your financial prosperity.