RRSPs and TFSAs: Which is right for me?
Canada Life - Dec 20, 2022
Helping you understand what sets these two savings options apart
With so many savings options available, it can be challenging to find the right fit for your needs. Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are two popular savings vehicles. Both options are government registered and provide tax-advantaged savings.
What savings vehicle will work best for you depends on a number of factors, like your age, income, tax rate and future cash flow needs. Understanding the differences and benefits of both options will help you make the best decision for you, now and in the future.
The registered savings benefit
When you put money into a registered or non-registered account, it’s like planting a seed to grow a tree. Income generated from investments held within a non-registered account is usually taxed every year. Gains in the value of investments held within a non-registered account are also taxable when sold. It’s like pruning a tree, slowing some of its growth.
This isn’t the case with money held within an RRSP or TFSA, and this difference in characteristic of registered accounts can help your money grow faster – it’s like watering a tree. The unique tax treatment of RRSPs and TFSAs in addition to the benefit of compounded growth can mean a significant difference to your investments over time. Let’s take a closer look.
Contributions to an RRSP give you an upfront tax benefit. You’ll receive a tax receipt for the contribution amount that can offset your income when filing your annual income taxes. It’s almost like paying yourself twice – you pay into your savings plan for your future and you get an immediate tax break.
Any gains in the value of the investments in an RRSP are tax deferred. This means, you’ll only pay income tax on this money when it’s withdrawn from your RRSP at a later date. If you wait to withdraw money from your RRSP until retirement, you’ll likely pay lower taxes because your annual income is likely to be less than when you were working.
Unlike RRSPs, TFSAs don’t give you an upfront tax benefit. TFSA contributions are made with after-tax dollars. Any increase in the value of your TFSA is tax free. You won’t pay any taxes on money you withdraw at a later date.
Want to find out which option works best for you? Get in touch with me today.
Ask an advisor: RRSP or TFSA?
Find out the reasons to invest in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) and why an advisor should help you decide.
Description: This animated video introduces a character named Hinata and his advisor with illustrated graphics to show the difference between an RRSP and TFSA.
Text “Ask an advisor” appears. The camera zooms out as the text lands in an outlined square. “RRSP or TFSA?” fades in below. An illustration of a vault draws on the right side of the frame.
Hinata: How do I choose between investing in an RRSP or a TFSA?
Description: Hinata sits in his advisor’s office with a cup of coffee on the desk in front of him. His advisor’s head nods to the right of the frame. A laptop is placed in between them.
Advisor: Well, first off, it depends on several things,
Description: Cut to Hinata and his advisor sitting behind her desk. She leans in and gestures towards the laptop.
Advisor: including your age, income, tax rate, the goal you’re saving for, and how long it’ll be until you need to use the money.
Description: Cut to five squares with icons and text, labelled “Age,” “Income,” “Tax rate,” “Goal” and “Time.”
Advisor: A registered retirement savings plan or RRSP is used to save for retirement.
Description: A pie graph labelled “RRSP” animates into the frame. An illustration of a Muskoka chair appears in the middle of the graph.
Advisor: When you put money into an RRSP, you get a tax receipt that can offset your income taxes.
Description: The advisor’s hand enters the frame and moves a coin into the pie graph. Cut to an illustration of a receipt. The advisor's hand brings the coin over to the receipt.
Advisor: You only pay tax on this money when you withdraw, and in retirement, you generally pay less tax than in your working years.
Description: Cut to line graph showing age from 20 to 90. The line representing income rises until retirement at age 65, then decreases gradually afterwards.
Advisor: A tax-free savings account or TFSA can be used to save for retirement
Description: A pie graph labelled “TFSA” animates into the frame. An illustration of a Muskoka chair appears in the middle of the graph.
Advisor: or any other goal.
Description: The camera zooms out to show two more pie graphs, one with an illustration of a new home, the other with an airplane.
Advisor: When you put money into a TFSA, you don’t get a tax-receipt like with an RRSP.
Description: The graph in the middle of the frame grows larger. The advisor’s hand enters and moves a coin into the pie graph.
Advisor: However, you also don’t pay tax on any increase in value in your TFSA,
Description: The hand pulls the coin out of the pie graph as the camera pans to a line graph representing savings over 15 years.
Advisor: or on money you withdraw from it at any date.
Description: An illustration of a receipt with scissors fades in as the graph drops slightly at the 15-year mark to show a withdrawal. The line graph continues to increase over another 10 years, another drop appears at 25 years, then finishes growing at 35 years.
Advisor: RRSP or TFSA or both? I can help you choose the best option for you.
Description: The camera zooms out of the laptop to return to Hinata and his advisor in her office.
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