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Retirement Savings Plan (RRSP) vs. Tax Free Savings Account (TFSA)

January 23, 2013

Which one to contribute to – your tax-free savings account (“TFSA”) or retirement savings plan (“RRSP”)?  This, of course, varies from individual to individual and from year to year.

The key differences between your TFSA and RRSP are as follows:

  • RRSP contributions are tax-deductible while TFSA contributions are not;
  • Withdrawals and the income/gains earned on the investment from your TFSA are not taxable while RRSP withdrawals are taxable in the year of the withdrawal;
  • The maximum annual contribution to your TFSA is $5,000 ($5,500 for 2013) and to your RRSP is 18% of your previous year’s earned income up $22,970 for 2012;  (your exact RRSP deduction limit will be on your latest Notice of Assessment)
  • TFSA does not have a date when you have to start withdrawing;
  • TFSA withdrawals can be re-contributed in the following calendar year.

Some of the key considerations when deciding between your TFSA and RRSP are as follows:

  • Your current vs. future income levels – If you are currently in a lower tax bracket it may make sense to contribute some of your money to a TFSA. As your income level rises and tax savings become more of a priority, an RRSP may be the answer.
  • Federal income-tested benefits and credits – such as Old Age Security, Guaranteed Income Supplement, Canada Child Tax Benefit, GST/HST credit, etc. are calculated based on your level of income.  RRSP withdrawals are included in this income calculation whereas TFSA withdrawals are not.
  • Investment plan – If you are saving for the short-term, a TFSA offers more flexibility in terms of withdrawing funds.

Banks, insurance companies, credit unions and trust companies can all set up RRSPs and issue TFSA’s.  Your financial institution will advise you on the types of RRSP and TFSA and the investments they can contain.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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