Tax-free and tax deferred ways to save for the future: Comparing TFSA and RRSPs

Tax-free and tax deferred ways to save for the future: Comparing TFSA and RRSPs

If you’re looking for tax-free and tax deferred ways to save for the future, you have probably considered a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). It can be challenging to navigate which of these is right for you and the RaeLipskie Partnership wants to help you find the best fit for your financial needs. 

What is a TFSA?

A Tax-Free Savings Account is a registered account that is tax-sheltered, meaning you don’t have to pay tax on any funds within the account. A TFSA can hold both money and investments, such as stocks, mutual funds and more. Since there is no tax on the interest accrued in a TFSA this is a great option for growing your money. There are also no fees or taxes to pay when you withdraw from your TFSA.

What is an RRSP?

A Registered Retirement Savings Plan also has tax incentives. It is a tax-advantage account which means that specific tax breaks are offered to those who contribute to RRSPs to save for retirement. However, unlike a TFSA that is completely tax-free, an RRSP is not taxed on the year you make the deposit, but will be taxed when you eventually withdraw the money. When you turn 71, your TFSA will automatically turn into a Retirement Income Fund and you must withdraw from the account yearly once you’re 72.

TFSA Contribution Limit

The contribution limit for a TFSA is $6,000 each year. However, your unused contribution room from prior years is accumulative and any money withdrawn from your TFSA the previous year is also added to your contribution limit.

So, even if you’ve never opened a TFSA, you can still contribute the total amount allotted for each previous year since you turned 18.

The previous contribution limits are as follows:

  • $5,000 for each year from 2009 to 2012,
  • $5,500 for 2013 and 2014,
  • $10,000 for 2015,
  • $5,500 for 2016, 2017 and 2018
  • $6,000 for each year from 2019 to 2022

For example, let’s say you turned 18 in 2013, and open a TFSA this summer (2022). This means your total contribution room would be $61,500. 

You can read more about the TFSA contribution limit from the Canada Revenue Agency here.

RRSP Deduction Limit

The deduction limit for an RRSP is the maximum amount you can add to that account in a given year. This limit is unique to you and for 2022 it is 18% of your 2021 earned income or $29,210 – whichever is less. Your RRSP contributions for a year also go 60 days into the new year, meaning an RRSP contribution year begins and ends in March.

You can read more about the RRSP deduction limit from the Canada Revenue Agency here.

The Benefits of TFSAs 

  • You do not have to have earned income to contribute to a TFSA
  • Any gains made are tax-free for life 
  • Very few withdrawal rules – you can withdraw at any time without penalty 
  • You can re-contribute whatever you take out one year in the following year

The Benefits of RRSPs

  • You can deduct whatever contributions you make in a year from that year’s total income
    • Any money contributed is exempt from income taxes that year
  • You don’t pay tax on any investment earnings as long as they are in your RRSP
  • When you retire, your RRSP savings can be converted into a Retirement Income Fund or an annuity tax-free 
    • You will still pay tax on the regular payments you receive, but if you’re in a lower tax bracket after retirement, this will ultimately lead to paying less tax

How to Choose Between TFSAs and RRSPs

The main factor to consider when choosing between a TFSA and an RRSP is your income. 

If you make over $50,000 a year you may lean towards an RRSP. This is because you get to deduct whatever money you put into your RRSP from your income. Moreover, when you ultimately withdraw the money from your RRSP after you’ve retired, you’ll be in a lower tax bracket and pay less tax on that money. Also, since your RRSP contribution limit is based on your income, a higher income means that you’ll be able to contribute more to your RRSP each year, thus getting a higher yearly tax deduction.

If you make under $50,000 a year, a TFSA may be a better fit for you since it isn’t reliant on your income. The contribution limit for a TFSA stays the same regardless of how much money you make in a year. TFSA’s don’t have limitations, expiry dates or taxes to pay on withdrawals. This offers a variety of options for the money in your TFSA and gives you a lot of freedom as the account holder.

Whether you should open a TFSA or RRSP depends on your personal financial situation. If you have further questions or need help deciding how to proceed with your finances, the RaeLipskie Partnership is here to help. Reach out to us today to connect with a portfolio manager: https://raelipskie.com/contact/ 

Interested in learning more about another type of investment? Find out everything you need to know about RESP’s here.

Demystifying Savings Plans: RRSP or TFSA?

Demystifying Savings Plans: RRSP or TFSA?

Do you know the main differences between an RRSP (Registered Retirement Savings Plan) and a TFSA (Tax-Free Savings Account)? Both types of accounts can help you plan for your financial future while providing tax benefits, but each offers different advantages and limits. Consider your savings goals, income sources, and lifestyle when deciding between the two to help you make the most logical choice that maximizes your future savings.

Tax Benefits

Both RRSPs and TFSAs both provide tax benefits, but when you’re taxed differently between each plan. Contributions to RRSPs are tax-deductible, while contributions to TFSAs are not. The tax-deductible nature of RRSPs also means that there is a yearly deadline for contributing income to your RRSP, while TFSAs have no deadline. Conversely, withdrawals from TFSAs are tax-free, but RRSP withdrawals are taxed.

Consider where tax benefits will assist you in your saving the most. Will having tax-deductible savings contributions significantly decrease your tax liability, given your income tax bracket? If so, an RRSP may be the right choice for you. If you’ll benefit more from enjoying tax-free withdrawals (for example, if you’re saving for major non-retirement related expenses), then a TFSA may make more sense for you.

Contribution Limits

The annual contribution limit for RRSPs is much higher than it is for TFSAs. In 2016, the contribution limit for RRSPs was either 18% of your annual earned income, or $25,370 (whichever is the lower number), while TFSAs in 2016-2017 had a contribution limit of $5,500.

Both RRSPs and TFSAs allow you to roll-over any unused contribution room from previous years. However, making a withdrawal from your RRSP will result in a permanent loss of contribution room. If you need to withdraw from your RRSP at any point, that amount does not roll over to future years and cannot be “made up” for. On the other hand, any withdrawals made from your TFSA can be added to your contribution room in future years.

When it comes to income sources, TFSAs are more flexible than RRSPs. The contributions you can make to your RRSP are also confined to earned income only, while TFSAs can hold other types of income in addition to earned income, such as gifts, mutual funds, stocks, and bonds.

Age Limits

Both TFSAs and RRSPs have a minimum age requirement of 18. However, because RRSP contributions are confined to earned income, some young people may not be able to open one if their contributions will come from sources other than earned income. Additionally, TFSAs have no maximum age limit for closing the account, whereas RRSPs must be closed by the time the account holder is 71 years of age, at which point the funds must be transferred to an annuity or RRIF (Registered Retirement Income Fund). If you anticipate receiving any form of significant income after the age of 71, holding it in a TFSA may be a wise choice for you.

Choosing the best way to save your money involves a number of variables that can be difficult to predict. It’s always best to check with an independent wealth manager or financial advisor to help you choose the option that makes the most sense for your financial situation. Contact us at Rae Lipskie to book an appointment for planning your financial future.