RRSP or TFSA?

A Registered Retirement Savings Plan (RRSP) was, prior to 2009, seen as the best way taxpayers could save for their retirement. However, once Tax-Free Savings Plans (TFSA) were introduced, individuals became indecisive about which vehicle to invest into. One would think a TFSA would be more beneficial because of its “no-tax” impact. Well, it is not that simple. Deciding which option reels the most benefit is dependent on your future tax planning.

Here are a few things to consider when deciding which option to choose:

RRSP:

• There is a contribution limit for each taxpayer, each year. If you exceed the limit, CRA will charge a hefty penalty on over-contributed amounts exceeding $2,000.
• You can deduct contributions, up to your allotted limit, from your taxable income. For example, if your gross income for the year totalled $150,000 and you contributed your maximum limit of $20,000 to your RRSP account, you will be paying tax on $130,000 of income rather than the $150,000.
• As contributions into an RRSP are made with pre-tax dollars, withdrawals from the account will be subject to withholding tax.
• The year you turn 71 is the last year in which you can contribute to your RRSP.

TFSA:

• Contribution limit is the same for all taxpayers each year. For 2018, the annual maximum is $5,500. Your limit is also cumulative, meaning you can roll over unused contribution room year to year.
• Over-contributions are penalized by the CRA.
• Contributions cannot be deducted from taxable income.
• Withdrawals from a TFSA account are tax-free, as contributions were made with after-tax dollars.
• There is no age restriction when it comes to TFSA contributions.

If you are unsure of which option would best suit your needs, please consult with your accountant.