One of the most common questions I receive from my clients especially this time of year is should I contribute to a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). They both have their advantages, but the answer to the question depends on your personal financial situation.
An RRSP may offer more tax benefits, but you must pay income tax on any money that you withdraw from an RRSP. A TFSA may not provide as much tax benefits as the RRSP, but the money that you withdraw from a TFSA is tax free. Both an RRSP and TFSA act as a tax shelter, meaning any income, dividends or capital gains earned by the investments in each type of account are tax free.
Both savings vehicles can be used to invest for retirement. The key factor in determining which type of savings plan to invest in is your current tax bracket, and what your future tax bracket may be when you retire. In Canada, the second lowest Federal tax bracket in 2018 begins at $46,606. If your income is under that threshold than a TFSA is most likely your best option. This would be applicable to most younger investors who are beginning to save for retirement. Those investors that begin saving in a TFSA have the option later when their income is higher to move funds from their TFSA to their RRSP tax free, and reduce their taxable income by the amount of the contribution.
In regards to your projected retirement income, if you project to be in a higher tax bracket when you retire then consider a contribution to your TFSA because income you receive from your RRSP in retirement is 100% taxable. If you are projecting a lower tax bracket when you retire (which is a more common scenario) then contribute to an RRSP. These decisions are best made which working with a professional Financial Planner.
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