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Tax Free Savings Account (TFSA) or RRSP, what is right for you?

Tax Free Savings Account (TFSA) or RRSP, what is right for you?

Most investors have short-term goals, which may include a major purchase, vacation or establishing an emergency fund. There are several options available for your personal Tax Free Savings Account (TFSA) depending on the “term” of short-term and the your overall plan. Explore how a TFSA can help you save for these goals faster and tax free. You can put $5000 in a variety of investment options.

Your financial advisor can help you incorporate your short-term, long-term and tax planning needs into you financial plan.

Watch your savings grow tax-free throughout your lifetime.

To analyze which savings option is right for you, there are top five differences between RRSPs and TFSAs:

1. An RRSP is a savings plan mostly aimed at saving for retirement. this savings vehicle is a tax deferral savings plan. A TFSA is for all your other savings goals. Your goal can be to save for a car, improvements for your home, a vacation, for education, and can include so many other savings goals you may have.

2. RRSP is tax deductible, you don't pay tax on the money you save in an RRSP until you take it out (fully taxable). With a TFSA, it is not tax deductible, this comes from your after tax money. You don't get to deduct your TFSA contribution from the income you report on your tax return.

3. Whenever you take money out of an RRSP, the amount is added to your income and taxed at your current tax rate. With a TFSA, there's no tax on any money you take out – not even the money you made investing, including capital gains. You put your money in, then you get your money and growth out --tax free, it is that simple....

4. You have to close/collapse an RRSP after age 71. There is no time limit for contributing to a TFSA, contributions allowed past age 71.

5. With both plans, TFSA and RRSP, you can name your spouse or common-law partner as a beneficiary. However, only the spouse or common law partner can be the successor to the TFSA plan. The money will roll over to them upon your death. But with an RRSP, after your spouse or partner dies, there will be taxes due on any money left in the account. So if your children inherited the money, they would have to pay that tax. A TFSA is different. Your children would get the whole amount tax-free. That's because you've already paid the tax on the money you contributed to your TFSA.

It's also important to note that the maximum allowable RRSP contribution may be significantly greater than the amount that may be deposited in a TFSA. RRSP limits are based on the lower of 18% of earned income or the limit for the year. By comparison, Canadians may contribute up to $5000 to a TFSA in 2009, with future increases in the yearly limit indexed to inflation. This limit is the same for everyone, regardless of income.

The easy access helps make TFSAs a good supplement to RRSPs for people who want to continue saving for retirement but have maximized their RRSP contributions or have reached the age of 71 -- the age limit for RRSP contributions. There is no maximum age for contributing to a TFSA.

Now, let us try to answer the question RRSP or TFSA, which option is right for you?

The answer depends on…

• Your marginal tax rate (will your marginal tax rate be lower at retirement?)


• Other RRSP opportunities


• Will it be enough for you?


• Flexibility versus discipline


• Your primary savings goal(s)

There are other variables to consider in deciding which option is right for you. Analyse your personal financial situation, and with the advice of your financial advisor, decide on an option that is right for your financial circumstances.

This article is presented for general information only. Consult your financial advisor for advice regarding your specific financial situation.

Labels: estate planning, investment planning, Retirement Planning, save taxes, Savings Goals, tax free income, tax free savings account, tax planning, TFSA

posted by laramaryann @ 10:41 PM