|Contribution Limit||18% of previous year’s earned income subject to a maximum amount (1) plus carry forward of unused room (previous years) plus current year pension adjustment reversal (PAR) less pension adjustments (PAs and PSPAs)||$10,000 (2) plus carry forward of unused room (previous years) plus withdrawals from pervious year|
|Unused Contribution Room||Carries forward to future year||Carries forward to future year|
|Taxation||Contributes tax-deductible Income tax-deferred Withdrawals taxable||Contributes not tax-deductible Income tax-free (3) Withdrawals tax-free (3)|
|Impact on income-sensetivie benefits (4)||Withdrawals impact benefits||Withdrawals do not impact benefits|
|Withdrawals that are re-contributed require new contribution room||Yes||No|
|Age Restrictions||Avaiable to age 71; contributions to spousal RRSP allowed after 71 if spouce or common-law partner is younger than 72||Available beyond age 71|
|Eligible Investments||Cash, mutual funds, stocks, bonds, deposits, GICs, certain small business corporation shares||Cash, mutual funds, stocks, bonds, deposits, GICs, certain small business corporation shares|
|1 maximum amount defined by the government each year 2 Increases within inflation periodically 3 refers to income tax 4 Federally-sponsored benefits|
Recommendation… Do both! If you are able to maximize both RRSP and TFSA, it is generally a good idea to do so. Monies invested would benefit from tax-efficient growth, which generally leads to enhanced portfolios in the future. But what if you can’t afford to contribute maximum amounts to your RRSP or TFSA? How do you determine which plan is best for you?
One size doesn’t fit all – It is important to understand that there is no one solution that suits every Canadian. Many factors play a role in determining
the optimal allocation between RRSPs and TFSAs. Factors to include:
|Are you investing for the short-term or long-term? If you are investing for the short-term (eg. saving for a car, vacation, etc.), the TFSA is generally considered the better option. Tax-free withdrawals and the ability to re-contribute withdrawals in a future year without requiring new TFSA contribution room speak to the flexibility of the TFSA. Because RRSP withdrawals are taxable (which serves as a psychological barrier to many when considering acces to these plans), and because RRSP contribution room cannot be recovered when amounts are withdrawn, RRSPs are generally used for long-term needs or short-term needs when special access is provided (eg. Home Buyers’ Plan or Lifelong Learning Plan).||
What is your current tax rate, and what do you expect your rate to be hwen you need the money? Tax rates at the time of contribution and withdrawal make a difference. For example, if you are currently taxed at a 45% tax rate and intend to withdraw your RRSP or TFSA while stil at a 45% rate, the after-tax amount from each plan would be the same assuming identical rates of renturn. In other words, from a tax perspective, there is no difference between investing in an RRSP and TFSA when rates of return are the same and tax rates are consistent at teh time of contribution and withdrawal.
Still not sure how to invest, contact one of our advisors today to help you create a financial plan that suits your lifestyle!