Difference between RRSP and TFSA in Canada and What’s best for you?
Both RRSP (Registered Retirement Savings Plan) and TFSA (Tax-Free Savings Account) are contributory accounts that individuals can establish to shield their investments against taxes. Both are referred to as registered plans. Meaning, the service providers need to intimate the CRA about the flow of investments into these accounts. Both allow individuals to maintain investments in various products like stocks, bonds, exchange-traded funds, mutual funds, and GICs.
Contributions made to the RRSP accounts do not get taxed at the time of contribution. However, they are subject to taxation at the time of maturity, i.e., at retirement. On the other hand, TFSA funds and their subsequent profits are free from any form of taxes.
CRA intimates the individuals for their annual contribution limits to RRSP basis their tax assessments. The annual TFSA contribution limits are announced for the population in general.
As RRSP and TFSA offer tax savings, one option may prove to be more beneficial than the other in certain situations.
RRSP is best in following situations
Any investments made into RRSPs are deductible from an individual’s taxable annual income. TFSA does not offer such benefits. RRSPs are a better choice for individuals who are not good at planning for their retirement. Except for a few specific situations, RRSP funds carry a withdrawal penalty if withdrawn before retirement.
Depending on the income they earn. Individuals can contribute more amount to their RRSP over a lifetime.
TFSA is best in following situations
Funds in RRSPs get locked in till retirement, and premature withdrawals will entail penalties. However, funds in TFSA act as ‘backup’ or ‘emergency’ funds and can be withdrawn anytime without worrying about tax implications. TFSA can benefit a young individual who expects to retain their TFSA investments over a long period. Their investment will continue to earn them tax-free returns, ultimately helping them reduce taxable incomes. For seniors, contributions to TFSA do not have any implication on their retirement benefits (namely, OAS and GIS) being clawed back. As unutilized TFSA contribution room continues to add up every year, there is no time limit for when an individual ‘has to’ invest into their TFSA.
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