Understanding How Investing in RRSPs and TFSA Can Work For You
It’s almost Registered Retirement Savings Plan (RRSP) season and Canadians will be debating between contributing towards RRSPs or tax-free savings accounts (TFSA). Both investments are excellent tools for building a strong retirement plan or simply saving for a rainy day. Many investors such as yourself are wondering which solution is best for them?
There are many similarities between an RRSP and TFSA, but there are some key differences that can have an impact on your financial planning. Both solutions can help you achieve your short-term and long-term goals. One strategy is not better than the other. With both options providing you with secure ways to benefit from tax-deferred or tax-free financial growth. Working with an experienced financial advisor will give a great understanding of which method is best for your own financial plan.
Both investment strategies allow for different tax-free contribution amounts. Each year tax rules allow you to add tax-free funds to your TFSA, the amount will vary from year-to-year. Currently, Canadian taxpayers are able to add $5,500 for 2017. RRSP contributions can equal 18 percent of your previous year’s income, less any pension amount, up to the maximum annual RRSP contribution limit for the year. You can find out more about your personal investment limits by visiting the Canada Revenue Agency’s online portal, or by utilizing the telephone tax information service.
Thinking about carrying-forward unused contribution room from previous years? Both TSFAs and RRSPs do allow for carry-forwards. You can carry-forward unused TSFA room indefinitely, while carry-forwards are allowed for RRSPs until the year you reach the age of 71. Contributions towards your RRSP are tax-deductible, thus reducing your annual taxable income. Funds invested into your TFSA are not tax-deductible; this is a key difference between the two savings strategies.
The funds you earn by investing in a TFSA will never be taxed, the same cannot be said for an RRSP. You RRSP earnings will not be taxed in the short-term, but eventually, you will need to pay tax on the earnings generated by your RRSP when you withdraw the funds. When the RRSP is withdrawn the amount will be added as income when you file your taxes that calendar year.
Sounds complicated, right? Think about it this way. Your block of money in your RRSP you haven’t yet paid tax on so when it comes time to collect it, it becomes taxable. Your TFSA is done with after tax dollars so you’ve already paid tax on it so withdrawals are not taxed.
Life is not predictable and you may need to withdraw your investment for a rainy day, an educational expense, or for various other reasons. Funds held in a TFSA can be withdrawn at any time (depending on what you’ve invested in), money invested in RRSPs can also be withdrawn. The amount of your withdrawal will be added to your TFSA contribution room for the following tax year.
A TFSA is a great way to begin a new investment plan that can help you meet your short-and-long term savings goals, while an RRSP is one of the most effective ways to build a strong retirement plan. It’s important to understand all the characteristics of each strategy in order to design a plan that works for you and your goals.
A good financial advisor will be able to look at your situation, in particular your tax bracket and determine which would be the most effective way to save. They key thing is to have a plan and be committed to saving.
Many of our customers have found that a TFSA is a great way to save up for a future goal such as a new car, a dream vacation, home renovations and other large purchases. The tax-shelter of the TFSA allows you the ability to save quicker. Many of our customers have benefited from having both an active RRSP and a TFSA working together to achieve their investment goals and to build a financial nest egg.
Learn more about how an RRSP or TFSA can help you save for your financial goals. We’ve been providing financial advising services in Markham, Richmond Hill and throughout the Toronto area since 1999. Our financial advisors are here to help build a plan that suits your goals and budget. We have a diverse selection of both RRSP and TFSA options designed for you. Contact us today to determine the best savings and investment strategy for your needs.