The one fundamental that all investment advisors can agree on is for you to save your money. The grey area starts when deciding on which saving vehicles to use: your tax free savings account (“TFSA”) or retirement savings plan (‘RRSP”). The key differences between your TFSA and RRSP are as follows:
- TFSA contributions are not tax deductible;
- Withdrawals from your TFSA are not taxable, including income/gains earned on the investment;
- The maximum annual contribution to your TFSA is $5,000 whereas your RRSP limit is 18% of your earned income up $22,970 for 2012;
- TFSA does not have a maturity date whereby you have to start withdrawing; and
- TFSA withdrawals can be re-contributed in the following calendar year.
Some of key considerations when deciding between your TFSA and RRSP are as follows:
- Your current vs. future marginal tax rate – If you are currently in a lower tax bracket you are not getting the full tax benefit of a RRSP in the year meaning it may make sense to contribute some of your money to a TFSA. As your income level rises and tax savings become more a priority, a RRSP may be the answer.
- Receiving benefits – Certain benefits are calculated based on your level of income (e.g. Old age security, child tax benefits etc.). RRSP withdrawals are included in this income calculation whereas TFSA withdrawals are not.
- Investment plan – If you are saving for the short-tem, a TFSA offers more flexibility in terms of withdrawing funds.
If you are now officially confused, you are in the majority. Let Welch LLP help advise you on the savings strategy that best suits you.