You might be familiar with different investment options, but it can be hard to know which one is the best for you. Taking a deeper look into the key differences between a TFSA and an RRSP, we hope this helps you decide which account is the best option for helping you invest in your future.
RRSP
An RRSP is a Registered Retirement Savings Plan. Employed Canadian citizens can invest pre-taxed funds that can grow tax-free until withdrawal. Contributions you add to an RRSP account are tax-deferred; the money is taxed only when it’s withdrawn. Because you typically earn less in retirement than while you’re working, RRSP withdrawals won’t be taxed as high.
One important thing to note about an RRSP account is the amount you can contribute. You can The average rate of return for a retirement savings account typically lands between 4-8%. This changes based on how long you’ve had your account, which assets you’ve invested in, and how much you contribute annually.
TFSA
A Tax-Free Savings Account is a great way to store your money tax-free while it grows. Unlike an RRSP, your TFSA contributions are not tax-deductible, but you’re free to withdraw money at any time without paying taxes on it. Each year it’s important to check what the contribution limit For 2020 it’s $6,000. One of the penalties for overcontributing is losing 1% of your investment per month that is over the limit.
Anyone 18+ with a valid SIN number is allowed to open as many TFSAs as they like. It’s important to note the limit is still $6,000 whether it’s spread out between five accounts or all stored in one.
When comparing an RRSP or a TFSA, one thing to consider is when you want to pay the taxes. When you contribute to an RRSP, you defer paying the taxes until you withdraw. When you contribute to a TFSA, your contributions are after-tax.
If you’re a higher income Canadian and you have available funds for long term savings, starting an RRSP can be a great option. Your contribution will be tax-deferred, so you’ll pay less taxes today and instead, pay those taxes when you withdraw the money. This is a benefit because most people are in a lower tax bracket when they are retired.
Both savings accounts carry over the money from the contribution limit that you have leftover. For example, if you’re working with a TFSA, if this year you only invest $2,000, next year you can invest the regular $6,000 limit the government has plus the $4,000 that you didn’t put in the year before. The same works for RRSP but the contribution limit is different. This is important to keep in mind because at different points in your life, you will be able to invest more or less depending on changes in your financial situation. For example, If you’re a post-secondary student, oftentimes you don’t have a lot of disposable income to put in a savings account. If after starting your career you now have the available income to add to a TFSA or RRSP, you can add the carried over amount from years before when you didn’t have the funds to invest.
If you encounter financial difficulty due to unforeseen circumstances, such as loss of income in this pandemic, having money in a TFSA makes it easier to withdraw and use the money you’ve been saving if it’s needed. It’s a good habit to be regularly investing in your TFSA; contributing even the smallest portion of your income every month can go a long way. After 6-12 months you’ll have a solid amount of savings available to you should you take another unexpected financial hit.
For more information on opening an RRSP, TFSA or other investment options, you can email The Morga Ross Advisory Team at morga-rossadvisotryteam@wprivate.ca or call 204-410-2723 to set up a free consultation.
