Why the Dilemma? RRSP and TFSA

TFSA vs RRSP debate

TFSA vs RRSP debate

The Money Dilemma: TFSA vs RRSP

Being only a few months away from the RRSP season, I ask myself where I should be putting my money. I recently sat down with Ron Halabi, who is my Certified Financial Planning professional, Ron explained to me that this question tends to pop up every year during this season. There is still a great deal of confusion as to the benefits of each product and how each one can be used to maximize savings. So, here’s the dilemma: Where should my money go?

As a rule of thumb, if you believe your income in retirement will be higher than it is today, then you should consider a Tax-Free Savings Account (TFSA) as your primary source for savings. If you anticipate that your income will be the same or less than it is today, then a Registered Retirement Savings Plan (RRSP) may be your best option. Why? Allow me to explain. When you contribute money into an RRSP, you reduce your current year’s earned income by the amount deposited. The result is a reduction in your income tax due, and can result in a refund. The benefit at retirement is that if your income is less than your income today, the amount you receive from your RRSP/RRIF will be taxed at a lower rate and therefore you keep more of your money!!! If your income is greater than it is today, then you lose the tax savings benefits because you will be taxed at a higher rate in the future and will therefore pay more in taxes and have less money than you would today. Who wants to pay more taxes in retirement, right?

Another issue that may arise is that your RRSP income may have an impact on your government retirement benefits (Old Age Security – OAS) in the form of a claw back if your income is too high. To avoid this, your Financial Planner should have regular annual meetings and projections calculated with you to determine the appropriate amount of desired income based on your goals and determine if the future projected income will have any effect on your benefits.

With TFSAs, depositing does not leave you with a reduction in taxable income for the year, and will not provide you with any benefit on a tax return, BUT, the investment is completely non-taxable on withdrawal. That being said, TFSAs will have no bearing on your retirement income from the government (OAS). In addition, any amount that is withdrawn can be re-contributed the following year. Also, you have higher levels of accessibility without worrying about with-holding tax like an RRSP may have.

At the end of the day, which account is best is more importantly decided by your goals and financial situation. It’s not a TFSA vs RRSP but using the the benefits of both products in a proper financial strategy. Regardless of which you choose, a professional financial planner would be able to assist you in determining the best options for you. Either way, the better question should be: Have I started saving yet?

Article courtesy of Ron Halabi, Certified Financial Planner 647-831-4002

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