TFSA or RRSP - Which one should you look at?
Starting to save money is important at any point in your life. But, with so many bank account types and options out there, how do you decide which one is best for you?
Whether you are deciding to save for the long-term, or the short term, the saver must decide whether to make that investment in a TFSA, a RRSP, or perhaps a combination of both! How you decide is dependent upon your goals, but it also depends also your time horizon and tax situation.
THE BENEFITS OF A TAX FREE SAVINGS ACCOUNT (TFSA)
- While you have to be 18 to open a TFSA, there is no maximum age to contribute.
- Unused contribution room can be carried forward indefinitely. (For example, last year’s maximum contribution was $5,500, but you only contributed $500. This year, your contribution room would be $11,000- $5000 not contributed from last year and $6,000 for the current year).
- You can withdraw at any time, tax free.
- There is no age requirement for withdrawals.
- Withdrawals are not considered taxable income so will not affect benefits like Old Age Security (OAS).
- Withdrawals create more contribution room.
As long as you are at least 18 years old, a Canadian resident, and you have a Social Insurance Number (SIN), you are eligible for a TFSA.
On the other hand, there is no tax deduction for contributions and the maximum annual contribution limit for 2019 is $6,000 per individual.
This is a great account for both younger and older individuals who need their savings to be accessible in the short-term.
THE BENEFITS OF A RETIREMENT SAVINGS PLAN (RRSP)
- There is no minimum age to open an RRSP.
- After you turn 71, your RRSP is automatically rolled into a Registered Retirement Income Fund (RRIF).
- Contributions are tax deductible.
- Unused contribution room can be carried forward indefinitely.
- Withdrawals are considered taxable income. (This could reduce benefits such as OAS.)
- Maximum contribution room for 2019 is 18% of the previous year’s earned income (up to a maximum of $26,500 plus any unused contribution room from previous years).
As long as you earned qualified income in the previous year, are a Canadian resident, and have a SIN, you are eligible for a RRSP.
On the other hand, withdrawals are taxed as income and could potentially reduce future benefits.
This is a great account for those who are thinking long-term who wish for the benefits of tax deductions. In RRSPS, withdrawals do not create additional contribution room.
In Conclusion
There are many benefits to both types of accounts. If you’re ready to make that step towards saving for your future, and want even more information on what account is right for you, call me today!