Personal Investor: RRSP or TFSA? The right one for you
It’s RRSP season and that means the investment industry will be pulling all the stops to get your contribution dollars before the March 1 deadline.
Before making a contribution, you might want to consider the relatively new kid on the block: the tax-free savings account (TFSA). Both the registered retirement savings plan and TFSA are tax-saving tools that can hold investments in just about anything, but depending on your personal financial situation, one may be better than the other.
Registered retirement savings plan
Contributions are tax deductible: The amount you contribute to your RRSP can be deducted from your taxable income. If you are in a 30 per cent tax bracket, for example, each dollar contributed will result in a 30-cent tax saving.
Grows tax free: Investments in the portfolio grow and can be bought and sold with no tax consequences. That means tax savings can remain invested and compound over the years.
Fully taxed when withdrawn: When funds are withdrawn from an RRSP in retirement they are fully taxed at the individual’s going rate. Ideally, by that time, the individual will be in a lower tax bracket
Contribution limits: RRSP contributions are limited to 18 per cent of your previous year’s income to $26,500 for 2019. If you do not contribute the maximum, that contribution space can be carried forward to future years.
Tax-free savings account
Tax-free returns: TFSA contributions cannot be deducted from your income like an RRSP but, like the name implies, withdrawals are never taxed. That includes gains on any investments.
Can be withdrawn at any time: There are no restrictions on when you can dip into your TFSA.
Contribution limits: The TFSA contribution limit for 2019 is $6,000 but if you have not contributed the maximum amount in previous years those amounts can be carried forward like an RRSP. The total amount since the TFSA’s inception in 2009 is $63,500. It’s important to note that anyone who contributes the maximum amount, and makes a withdrawal, must wait until the next calendar year to regain the contribution space.
February is Your Money Month at BNN Bloomberg. For more stories and practical advice on how to employ your money wisely, visit our Personal Finance page.