TFSA versus RRSP
Even without the long acronyms these two money saving products have a lot on common. Both investment vehicles offer tax incentives for savers and encourage you to plan for the future.
Here’s how these 2 options measure up against each other.
| TFSA | RRSP | |
| Tax deductible? | TFSA contributions are not tax-deductible. So your contribution will not affect your taxable income in the year that you make a deposit.The contribution and investment earnings are exempt from taxation upon withdrawal. | Money that you put towards your RRSP is tax deductible. It therefore reduces your taxable income in the year that you contribute.When you withdraw from your RRSP this money is added to your income and taxed at current rates. |
| Contribution limit | You can invest up to $5,000 per calendar year in a TFSA. | It’s a bit more complicated trying to figure out the maximum contribution limit for an RRSP without tax implications. For 2011, it is roughly $22,000, but this is dependent upon your previous year’s income and pension adjustments. For more information, visit the Canada Revenue Agency.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html |
| Access | You can access your money at any time. | There are different types of RRSPs. Locked-in RRSPs will not allow you to access your money until you hit a certain retirement age. If your RRSP is not locked-in you can withdraw the funds at any time.Money that you withdraw from an RRSP will then be taxed in that year. |
| Taxes on withdrawal | All of the money that you earn from your investment (i.e. interest, capital gains, etc) is tax free. This means that your money can grow in the fund tax free and when you want to withdraw it, that income will also be tax free. |
RRSPs are tax deductible and your portfolio grows tax sheltered.This means that you get the tax benefit when you put your money in. When it comes time to withdrawing the funds, you will be taxed then. |
| Investment vehicles accepted | A number of different investment vehicles qualify, including high interest savings accounts, GICs, bonds, mutual funds and stocks | It can contain a variety of investments such as: RRSP savings deposits, treasury bills, GICs, mutual funds, bonds, and equities. |
| Beneficial for | People who expect to be in a high tax bracket during retirement years. | People who expect to be in a lower tax bracket during retirement years. |
| Minimum age limit | You need to be 18 years of age and a Canadian resident to qualify | No age restriction necessarily, but you do need to have generated RRSP contribution room by claiming earned income – which can be done by filing a tax return. |
| Maximum age limit | There is no age limit. | You are not eligible to contribute after the age of 71. |
| Benefits | The money in your TFSA can be put towards whatever you’d like – there are no restrictions as to how or when you can use the money. Also, unused contribution can be carried forward and accumulates in future years. |
The tax benefits are immediate. Also, come retirement age, you’ll be glad you put some extra money away |
Related Articles
- Using RRSP for Down Payment (Home Buyers’ Plan)
- How to Assess your Risk Tolerance
- Readvanceable Mortgage
- Tips for First Time Home Buyers
What is The Home Buyers’ Plan? How can I use my RRSP as a down payment when buying my first home? Your questions answered. READ MORE
Most investments require a certain amount of risk. The goal is to strike that balance between risk and reward. Before making any type of investment you should first determine your own risk comfort level. To do this, consider the following questions. READ MORE
What if you had access to additional funds at great mortgage rates that you could borrow at your leisure? Sound like a dream? With a readvanceable mortgage you can actually make the equity you have built in your home work for you now, rather than later. Here’s how. READ MORE
Buying your first home is a big step. Check out our top 7 tips to give you a boost onto the property ladder and help you save money on your first home! READ MORE
