All Articles / Jun 10, 2020

Weighing your options: RRSP vs. TFSA

You may already use an RRSP to invest for the future. Did you know there’s another option—the Tax-Free Savings Account, or TFSA?

What is an RRSP? A Registered Retirement Savings Plan (RRSP) is an investment account that allows you to save money for your retirement while lowering your income tax.

What is a TFSA? The Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income.

There are benefits to both types of accounts; let’s take a closer look:

RRSP

  • Contributions are deducted from your annual income to reduce the amount of income tax you must pay for that year.
  • Each year there is a limit to the amount you may contribute to your RRSP.
  • Unused RRSP contribution room can be carried forward. It’s best to confirm unused contribution room with the Canada Revenue Agency (CRA) or your tax specialist.
  • Amounts withdrawn, usually in the lower income-earning years of retirement, are fully taxable at that year’s personal income tax rate.
  • You can choose from a wide range of investment options such as mutual funds*, GICs, ETFs*, and more.

TFSA

  • Canadian residents age 18 or older can contribute up to $6,000 annually.
  • Contributions are not tax deductible, which also means that withdrawals and investment income earned in a TFSA is tax-free.
  • Unused TFSA contribution room can be carried forward. It’s best to confirm unused contribution room with the CRA or your tax specialist.
  • You can choose from a wide range of investment options such as mutual funds, GICs, ETFs, and more.

The challenge is deciding when it’s best to choose a TFSA over an RRSP. It’s a very personal decision; however, here are some scenarios to consider.

  • If you would like easy and frequent access to your money, you absolutely should choose a TFSA. You’ll be able to withdraw funds tax-free at any time and re-contribute the same amount in the future (not until the following year of the withdrawal). An RRSP is intended for long-term retirement savings.
  • You may benefit more from the tax-free growth and withdrawal flexibility of a TFSA than from the modest tax deduction of an RRSP if you are managing with a lower income.
  • Just starting out? We might suggest investing in a TFSA before an RRSP. Over the years you’ll accumulate RRSP contribution room that you can eventually take advantage of when your income is higher. At that time, an RRSP tax deduction will have a bigger impact.
  • If you are saving to buy a home or for your education, a TFSA may be the better option. Even though you can access RRSP savings through the Home Buyers Plan or Life Long Learning Plan, you must repay the funds within a limited time and follow other guidelines, as well.
  • If you hold investments in non-registered accounts, you might consider transferring your savings ‘in-kind’ to your TFSA so they can grow tax-free. Be sure to speak to a member of Kindred’s Investment Team first because there are many issues to consider.
  • If you hold a pension plan through your employer, you may wish to use a TFSA to augment your retirement savings. Further, if you are maximizing your RRSP contributions, you can put additional savings in a TFSA rather than a non-registered plan so your money can grow tax-free.
  • Perhaps you don’t need all your RRIF/LIF income; you can move it to a TFSA where it can grow tax-free until you need the funds.

There are plenty of reasons to choose one type of investment over the other; however, your unique financial situation will determine the right choice for you. Speak with a member of Kindred’s Investment Team today to discuss your options.


* Mutual funds and other securities are offered through Qtrade Advisor, a division of Credential Qtrade Securities Inc. Mutual funds are offered through Qtrade Asset Management Inc. The information contained herein is provided for general informational purposes only and is not intended to provide, and should not be relied upon as providing, legal, accounting, tax, financial, investment or other advice, or a solicitation to buy or sell any securities. Economic and market conditions are subject to change.

Brian Barsness

Brian Barsness, CIM, RIS, CKA

Director, Investment Services / Kindred Credit Union Brian is a recognized investment and wealth management leader with over 25 years of industry experience, including a specialization in socially responsible investing.

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