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RRSP vs. TFSA

June 3, 2017
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Our Canadian tax calculator allows you to input your RRSP contribution for accurate tax estimate. Via Registered Retirement Savings Plan (RRSP)  and a Tax Free Savings Account (TFSA) , the CRA has allowed Canadian Citizens to do this with two great savings accounts.

The big question people want to know, is which one of these is better for me? As every tax payer is in a different situation there is no template answer for this response, but understanding the two accounts will allow you to make an educated decision on which account works best.

Registered Retirement Savings Plan

An RRSP is also a savings vehicle where Canadians can deposit contributions over the course of the year up to 18% of their earned income from the previous year up to a maximum $26,010 for 2017.

This amount changes year over year and is determined by the CRA. With an RRSP instead of having your income sheltered, it’s deferred to the time when you want to withdrawal it.

What this means is the amount of the contribution is deducted from your taxable income during the year of the contribution, or the first 60 days of the following tax year, and any growth on your money is tax deferred to the point of withdrawal.

You may jump to the conclusion that a TFSA is better, after all a TFSA shelters growth from tax where an RRSP only defers it it’s a no brainer right? Wrong.

As an RRSP allows the tax to be deferred to the time of withdrawal you have to think about how much money you’re making compared to how much money you’ll be making when you take the money out of the RRSP.

Most of us plan on retiring and living off Old Age Security, Canada Pension Plan and savings, which isn’t a lot of money, and as we know the lower the income level the lower the tax bracket.

So if you’re in a high tax bracket today, lets saying paying 54% in Nova Scotia’s highest tax bracket, you can tuck that money into an RRSP and withdrawal it when you’re in a 24% tax bracket. That’s an automatic 30% return on your money at the absolute minimum, tough to guarantee that in an investment.

Now that you know the difference between the two products you can make an educated decision. For someone just starting their career with a low level of income a TFSA probably makes the most sense, you don’t lose access to the money, and with an RRSP you’ll most likely withdrawal the money at a higher tax rate.

A high income earner would want to do the opposite by using as much of their RRSP as possible, and then their TFSA. The balancing act is for people making a moderate income level, and may of come into money through inheritance, bonus, or service award. If you are in this situation consider speaking to your accountant to determine a strategy that will result in the greatest tax savings for you.

Tax Free Savings Account

A TFSA is a savings vehicle which allows Canadian taxpayers to deposit contributions throughout the year and invest these contributions in marketable securities which shelters all returns from tax.

The CRA determines how much money can be contributed to these accounts on an annual basis announced in the Federal Budget, for 2017 the maximum amount is $5,500.

If a taxpayer has been a Canadian since the TFSA program was launched in 2013 they would have a total of $52,000 of contribution room. With your TFSA open, and with the help of a financial advisor you can determine what marketable security you want to hold, your money can now start working for you.

With a TFSA you can make contributions and withdrawals when you require the money, and as the contributions were made with after tax dollars, there are no tax consequences to you when it is withdrawn.

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