Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) are excellent saving options but it can get confusing when deciding which the best fit is for you.
Here’s a more simplified look at each alternative.
- TFSA’s and RRSP’s let you put your money into any type of investment and shelter you from paying tax for as long as the funds are held in your account.
- In an RRSP, your contribution is deducted from your income, which may result in a tax refund, but your money will be taxed when you use it down the road.
- In a TFSA, you do not get a tax break but when you need your cash it won’t be taxed when you take it out.
- RRSP’s have a contribution limit of 18% of your previous year’s income (to a max of $24,270, for 2014) whereas a TFSA has a $10,000.00 limit per year. Both plans allow you to carry forward funds so that you can “catch up” on the years when you weren’t able to save.
- TFSA’s are flexible and if you need to take out funds there are no ramifications.
- If you need to access money from your RRSP, say for an emergency, there will be a tax liability payable that year. RRSP’s will allow first time home owners a $25,000 withdrawal and for those furthering their education a $20,000 withdrawal is also permissible.
Note: This money must be repaid within ayear time frame or you will face serious tax problems!
- If you’re trying to decide whether the RRSP tax break makes a better option, one consideration is to look at your taxable income (income after deductions). If it is above $43,561 for 2013 your marginal tax rate jumps into another category, and therefore your RRSP contributions will produce a larger tax refund. Below that line, the benefit of going with RRSPs is not as compelling.
- Since withdrawals from RRSP’s have such a significant tax consequence, it makes it more difficult to remove funds. This added level of hardship deters many from taking this route and these funds remain invested until retirement.
- If your employer matches your contributions to a workplace retirement savings plan you should take advantage of RRSP’s. This is “free” money and should be priority over other options if you can’t do both.
- The accessibility of TFSA’s is an important consideration if you have different goals than saving for retirement. If your goals are saving for a wedding, a car, or travel, this may be a better option.
- If you are carrying debt, be it a student loan or from credit cards, retiring the debt can be an excellent investment as well. Once you have cleared the debt, beginning a savings plan with the same funds can be a part of your budget.