TFSA vs RRSP ?? Which one is better for you and why
There has been a lots of discussions around us on which one is better, is it the TFSA or RRSP. Both of these are great savings and investing tools, but there are some key important differences between them and choosing correctly between the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) can save you thousands of dollars in the long-term.
Here are the top six key differences between the TFSA and RRSP investments –
1. RRSP’s main purpose is for the retirement savings. TFSA can be used for any type of savings.
2. RRSP contributions are tax-deductible, not while contributing but during the time of withdrawal when your income is low. However if you plan to withdraw early (anytime sooner than retirement or when you are earnings are in higher tax bracket) you need to pay the tax accordingly as per to your previous years tax bracket. The TFSA contributions are not tax-deductible if you invest within your contribution limit (Login to your CRA account to know your contribution limit, you might have accumulated some amount from the previous years if you have not contributed much till date). Also, the TFSA 2017 contribution limit stands same as 2016 at 5,500 dollars. With the RRSP, you deduct your contribution from the income you report at tax filing. With TFSA, you can’t deduct your contribution on your tax return and vice versa.
3. You have to pay taxes on your RRSP withdrawals because you made the contributions with pre tax dollars. On a contrary note TFSA withdrawals are tax-free because you made the contributions with after tax dollars.
4. You are free to contribute to the RRSP account until you turn 71 and then you must close it, it’s a mandate. Then you have to use your RRSP savings to invest in RRIF or an annuity plan. With TFSA you are free to contribute as long as you want to, there is no age limitation.
5. You need income(earnings from the previous fiscal year) from a source to contribute to an RRSP but for the TFSA there is nothing as such.
6. Whether it’s the TFSA or RRSP, you can nominate your spouse as a beneficiary. In case of your death, money will roll over to them.But there is a catch with investments in the RRSP, after your spouse’s death, taxes will be due on the money outstanding in the RRSP account. So in that case when your children inherit the money, they will receive only the chunk of leftover after the tax are paid. But with the TFSA, taxes are applied only on the increase in the value of the TFSA since the day of demise when your children receive it. The best part is, if the amount your children will receive is not greater than the value of TFSA during the time of death then no tax is paid.
Now Lets look at some of the key features of the TFSA –
TFSA is a very flexible savings account tool that allows you to take money in and out of a tax sheltered account easily and without having to pay any penalty.
As TFSA investments are pre-taxed, unlike your RRSP investments, you are in total control of your withdrawal funds when you retire.
For the RRSP withdrawals tax rates are applied at the time of withdrawal with whatever the rate is at that point of time.
At the time you retire and start pulling out your from the RRSP and TFSA accounts, and if you are collecting government payments such as Old Age Security (OAS), the government takes your RRSP withdrawals into account. But thats not the case with TFSA.
All your investments growth inside the RRSP and TFSA tax-free.
Now lets look at some of the key features of investing in RRSP:
It’s a great feel to get a portion of your invested money in RRSP as your tax return. You can use this amount towards your RRSP contributions for the following year or for any other needs immediately.
RRSP’s are great way to build financial corpus in a disciplined way, as you are forced not to withdraw from unless you want to pay huge taxes (RRSP withdrawals can still be used tax-free towards school and your first home purchase).
RRSP’s are excellent investments for those with middle to high incomes and very high incomes whose tax slab is in the highest tax bracket .
With the RRSP’s, you can invest in the US stocks and ETF’s as there is no tax on the dividend (passive income) income you earn. So that’s another an other feather in the cap for RRSP.
So there you go, its time for you to make a choice between the TFSA or RRSP is good for you based on multiple factors like your income levels and the type of investment that’s applicable for your needs. Both are great investment tools and you can invest in both at the same time and benefit the rewards. Which ever investment tool you choose you are building a corpus towards your financial goals and wealth creation .
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