What a Piggy Bank Just Won’t Do

You’ve reached a point in life where your job is going well, and you find yourself not only out of debt, but with some room for savings. You might start wondering, where should I put this money that will not only be safe for the future, but also grow? That’s when you’ll probably start hearing about TFSAs (Tax Free Savings Account) and RRSPs (Registered Retirement Savings Plan).

A Tax-Free Savings Account (TFSA) is an investment account that allows you to make gains free of tax. You can open multiple TFSAs but the amount that can be contributed is limited each year. A TFSA can be used for any savings goal and withdrawals are free of tax.

An RRSP is a retirement savings plan that you establish and register with the Canadian government, to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

Now you know what they are, you might be asking, which one is better? It all depends on your situation. The chart below might help answer that question.

Reasons to save in a TFSA:

YOU ARE YOUNG AND YOUR INCOME IS LOW

If you are in a low tax bracket, you get less benefit from the tax-saving aspect of an RRSP contribution. TFSAs are a good place to put money away during your time as a student or early years of working.

YOU‘RE LOOKING FOR AN EASY WAY TO SAVE

You can put money aside in eligible investment vehicles (such as a high-interest savings account or guaranteed investment certificate) and watch those savings grow tax-free throughout your lifetime!

YOU HOPE TO GROW YOUR SAVINGS TAX-FREE

Good news for you…the initial amount deposited in a TFSA, and any interest income generated is not taxable, even when you withdraw from it.

YOU WANT TO BE ABLE TO WITHDRAW YOUR SAVINGS ANYTIME

If you have an emergency come up and need funds right away, you can use these savings without paying taxes. It can also be used for things like buying a car or renovations.

YOU’RE AMBITIOUS AND WANT TO INVEST IN BOTH A TFSA AND A RRSP

The amount you can save in a TFSA during a year, no matter how much it is, has no impact on the amount that you can contribute to an RRSP.

Reasons to save in an RRSP:

YOU WANT A STEADY STREAM OF INCOME FROM YOUR SAVINGS IN RETIREMENT

Think of an RRSP as a self-funded pension plan because that’s basically what it is intended for. It gives you the chance to save more and build a nice nest egg for your future.

YOU WANT TO REDUCE YOUR TAXABLE INCOME

An RRSP contribution give you the potential of pushing you into a lower tax bracket because any contribution to your RRSP comes directly off your taxable income, with the potential to push you into a lower tax bracket.

YOU DON’T TRUST YOURSELF WITH MONEY AND NEED TO PUT YOUR MONEY SOMEWHERE YOU CAN’T GET AT IT EASILY

It’s extremely painful to withdraw money from an RRSP. You can be charged a withholding tax that can reach as high as 30%.

YOU’RE CONSIDERING CONTINUING YOUR EDUCATION

If you or your spouse is considering going back to school, you can take out up to $20,000 to pay education costs under the Lifelong Learning Plan (LLP). You won’t pay taxes on the withdrawals but you have to pay it back within a certain amount of time.

YOU’RE CONSIDERING BUYING A HOME IN THE FUTURE

You can borrow money up to $35,000 from your RRSP to buy your first house under the Home Buyers’ Plan (HBP). The amount is non-taxable, but you have to pay the money back within 15 years or pay tax.

Published by our DLC Marketing Team