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TFSA or RRSP? It’s All About the Tax | Sarah Twomey


TFSA or RRSP? It’s All About the Tax | Sarah Twomey.

Sarah Twomey

Writer, Desjardins Group

Posted: 02/24/2014 7:52 am

Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?

The fact is it’s all about the tax. Here’s a quick refresher of the tax-free registered savings account:

How much can I put into my TFSA? Since the beginning of 2013, you can now contribute up to $5,500 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn’t a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It’s also worth noting that your withdrawals won’t compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.

It’s a great retirement savings tool: If you’ve successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, keeping in mind your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won’t reduce your taxable income, you won’t receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP. By contrast, any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income.

Don’t forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off. If you could afford to, contributing to each year’s maximums in both plans would be ideal. Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.

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1 Comment

  1. My comment:
    The push by those involved in the financial system to get more people to contribute to RRSPs, TFSAs, and the like needs to be challenged on a number of levels, especially because those ‘insiders’ will not discuss the risks inherent in the current system. Remember what Benjamin Franklin said: “If everyone is thinking the same thing, then no one is thinking.”
    Such ‘investments’ are not risk free, yet this is rarely, if ever, raised by the system. We have many recent examples of such ‘investments’ being lost through bail-ins (Cyprus), bankruptcy (Detroit), and financial repression (Poland; and almost everywhere else). Don’t be naive enough to believe it could never happen here. It wasn’t so long ago that the US confiscated all of its citizens’ gold to remain solvent; or ignored its Bretton Woods obligations (both could be considered economic defaults).
    Safer investments are out there that don’t involve third-party risk (e.g. physical precious metals, farmland, etc.). Even investing in your home (e.g. increased insulation, redundant heating, home vegetable/fruit garden) would be much safer and harder for the-powers-that-be to confiscate when their fiat currency Ponzi collapses.

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