TFSA vs. RRSP: How do they compare? “Tax-free” is the critical differentiator!

It’s never too early or late to increase your savings, and right now is a good time to start. Remember, the more you sow the more you will reap. So always make the most of any and every savings plan you can invest in.

The Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP) and the latest Tax Free Savings Account (TFSA) are all great opportunities to set aside funds for a comfortable retirement while helping to meet your expenses. Plus they come with tax breaks in one form or another.

However as you explore the registered plans for increasing saving and reducing tax liabilities a question that often comes to mind is…”RRSP or the new TFSA - which one will work better for me?”

Read our basic guidelines on the TFSA and RRSP to understand how they differ so that you can make informed choices about your financial future.

What are some key differences between a TFSA and RRSP?

TFSA	RRSP
Tax – free Flexible account, no restrictions on what it can be used for. Can be used as an emergency fund for whatever you need. No need to pull funds from RRSP (HBP) and be taxed or lose contribution room when you cannot repay the yearly amount	Not tax-free Primarily for retirement savings. Home Buyers Plan (HBP) allows you to withdraw up to $25,000 for your down payment. Repayment must be made in 15 years with a stipulated sum each year. Or that amount is added to your annual income and is taxable.
You can contribute up to $5,000 irrespective of your income.	Contribution amount (limit) is determined by income – 18% of earned income.
Contributions are not tax deductible but investment earnings and withdrawals are tax exempt. Complements the tax assistance provided by your RRSP.	Contributions are tax deductible; however withdrawals are added to income and taxed at the regular rate
Unused contribution room is carried forward and accumulates for future years. No minimum withdrawal requirement. Withdrawal amount can be put back the following year.	Unused contribution carries forward. Must be converted to a retirement income vehicle at age 71 Withdrawals cannot be re-contributed.
Although there is no TFSA spousal plan, individuals can provide funds to their spouse or common-law partner to invest in their TFSA, keeping in mind the available room. The earnings are generally not attributed back to the spouse or partner who provided the funds. Specially good for low income earners with little RRSP room Individuals who have retired with a higher income have an additional place for tax-free savings.	Spousal (or common law partner) plan is owned by the contributor. It makes use of income splitting to give the higher income earner a tax break. Low income means lower RRSP contribution room. It will result in a lower tax refund.

It might be tempting to look into a crystal ball to predict bad weather but it’s an experienced financial gardener who will prepare the ground for your investments to produce rich returns. Get an established financial advisor who will dig out avenues for fertile investments, show you how increase your harvest and weed out financial instability or unnecessary risk. Saving for the future always needs careful consideration and smart planning.

Take advantage of investment expertise to learn how to structure your RRSP and TFSA (a self-directed plan has higher ROI) contributions for maximum benefits and/or use income-splitting to your advantage.

A self-directed RRSP and/or TFSA yields a richer harvest

If you want to optimize your earnings then a self-directed RRSP and/or TFSA is usually the best way to go. Many Canadians don’t have the time, inclination or knowledge to get their hands into financial gardening (get into the nitty-gritties of structuring and managing self-directed portfolios/accounts); but that doesn’t mean you can’t enjoy a plentiful harvest. The RRSP and TFSA are great investment tools when used correctly.

Knowing what to do is the key to a higher ROI.

Forum Tax Services has the expertise to be your financial gardener. We can help you set up a self-directed RRSP and TFSA that will produce increased returns.

Call us at (416) 562-0808 for a free consultation and evaluation of your current financial portfolio as well as more information on how you can benefit from TFSA investments.

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