Investing in RRSPs or TFSAs: What’s right for you?
If you’re self-employed or a small business owner, saving for retirement comes with its own set of challenges. Can you save for the retirement and get a tax break? An RRSP and a TFSA are both investment accounts, registered with the Canada Revenue Agency (CRA), that offer extra tax benefits as an incentive for Canadians to save more money, but depending on your circumstances, one might be better for your money than the other.
If you must choose one over the other, it’s important to understand how they differ. Here’s what you need to know.
What’s an RRSP?
A registered retirement savings plan (RSSP) is a tax-sheltered way to save for retirement and cut your tax bill. RRSPs can hold investments like bonds, stocks, mutual funds and exchange-traded funds.
Any money or contributions within your deduction limit that you put into an RRSP are deductible on your annual tax return. Along with the tax-sheltering, RRSPs provide a tax deferral – this means that you’re only taxed when you make a withdrawal.
While RRSPs are a great tool for retirement planning, you can also use them to do things like:
- Lower your taxable income as RRSP contributions are tax deductible
- Use the savings towards your first home
- Take advantage of the Lifelong Learning Plan (LLP) and go back to school
- split your income with your spouse
What’s a TFSA?
A tax-free savings account (TFSA) isn’t a typical savings account. It’s versatile, so you can use it to save for a more immediate goal, like saving for a new car or a trip, but you can also use it to save for your retirement.
Here’s how you can benefit from a TFSA:
- You don’t pay tax on any Income earned in a TFSA or on money you withdraw.
- You can open a TFSA as soon as you turn 18, and there’s no expiry.
- If you withdraw money from a TFSA, you can recontribute it to your account (but you must wait until after Jan. 1 of the following year to do so).
- You can put your TFSA funds towards many large expenses, including academic courses, a down payment on a home and retirement expenses.
- Your spouse can give you money to contribute to a TFSA without attribution of income.
What is right for me? TFSA or RRSP?
At the end of the day a TFSA and an RRSP both help you do the same thing – allow you to save money for the future. But they do it in different ways, so depending on your circumstances, having both can help you achieve your goals. Here is the comparison to give you an overview of the differences between each account to help you decide which – TFSA vs RRSP – is best for you.
March 1st every year to claim deductions for the previous year
Based on income. Either 18% of the earned income last year or 2022’s annual limit of $29,210 plus any unused contribution
$6,500 for 2023. If you have never contributed, you may be able to put in up to $88,000 in 2023.
How long can you contribute?
Dec. 31 of the year you turn 71
No limit. For life.
Lower your taxable income for the current year
None because contributions are made with after-tax income
What happens when you withdraw money?
RRSP withdrawals are treated the same as other pre-tax income, however, and are fully taxable.
Money withdrawn from your TFSA does not count as income and does not trigger any taxation.
Can you withdraw the money for other uses?
You can use RRSP contribution for down payment on a home or education for yourself or your spouse. Up to $35,000 for downpayment and up to $20,000 for education.
You can take money out anytime, and there’s no tax or penalties on withdrawals.
under 71 to open and contribute, Canadian resident, must have earned income and filed a tax return in the previous year
18+, valid SIN, Canadian resident
Plan ahead to reduce taxes and save for your future
The most important thing is to start saving now and make regular contributions to a TFSA or RRSP. That way, you know you have all your bases covered when it’s time to retire.
DM Tax accountants in Surrey, BC can provide much-needed guidance and strategy with respect to tax and financial planning with an eye towards retirement. If you have questions about maximizing savings and minimizing tax obligations, book a consultation today.