RRSP or TFSA: How to choose between the two?

RRSP or TFSA: How to choose between the two?

RRSPs and TFSAs each have their advantages and SSQ Insurance breaks them down for you!

RRSPs or TFSAs are two very popular savings vehicles, but when time comes to invest your money, which one should you choose?

Your decision will be based on your investment objectives, your age, tax bracket and the type of investor you are.

How do RRSPs and TFSAs work?

The first step is choosing a savings plan.

The next is choosing an investment vehicle:

RRSP

As its name indicates, a registered retirement savings plan (RRSP) is a financial account used for holding savings and investment assets for the purpose of retirement.

However, thanks to the Home Buyers' Plan (HBP), first-time home buyers can withdraw funds from their RRSPs to finance their down payment. They have 15 years to reimburse this amount.

RRSPs can also be used to finance full-time education. Thanks to the Lifelong Learning Plan (LLP), up to $20,000 can be withdrawn over 4 years tax free, and reimbursed over a 10-year period.

TFSA

The main advantage of a TFSA is in the accessibility of the funds, which can be withdrawn at any time.

In terms of taxation, TSFA interest income doesn’t have to be declared.

Plus, you have the option of investing in a qualified investment vehicle rather than a traditional savings account, for higher returns.

TFSAs are designed to help people save for short- and mid-term projects:

Who can contribute?

RRSP

There is no minimum age limit to contribute to an RRSP.

However, three conditions must be met:

  • You must have employment income, business income or unused deduction room.
  • You must have filed an income tax return.
  • You must be at least 18 years of age to contribute more than $2,000.

Spousal RRSP

If your spouse’s income is lower than yours, you might want to contribute to his or her RRSP because a spousal RRSP is probably your best option for future income splitting.

Remember that the contributing spouse is entitled to the tax deduction.

Contributions can be made to a spousal RRSP as long as the spouse is not over 71 years of age.

Ultimately, only one spouse owns the RRSP, which means that he or she will pay income tax on it when it is cashed out.

TFSA

You must be 18 years or over to contribute to a TFSA.

You cannot contribute to your spouse’s TFSA. However, nothing is stopping you from giving your spouse money to do so.

How much to contribute?

Whether you opt for an RRSP or TFSA, go to the Canada Revenue Agency‘s website to see how much you are entitled to contribute.

RRSP

To know your RRSP contribution limit, consult your most recent notice of assessment issued by the CRA.

This amount represents 18% of the income earned in 2019, up to a maximum amount of $26,500.

If you have never contributed the maximum amount to your RRSP since 1991, the eligible contribution amount (room) has been accumulating year on year.

The deadline for your RRSP contribution is always 60 days after the end of the previous year. In general, this falls on March 1.

TFSA

The Canada Revenue Agency determines the maximum yearly amount that you can contribute to your TFSA.

Years

Maximum amount

2019

$6,000

2016 to 2018

$5,500

2015

$10,000

2013 to 2014

$5,500

2009 to 2012

$5,000

When you don’t contribute the maximum amount, the eligible contribution room is cumulated year on year.

You have until December 31 of the current year to contribute to your TFSA.

What about income tax?

What happens when you invest money in an RRSP or TFSA?

RRSP

TFSA

Tax-sheltered investment growth

Yes

Yes

Tax deductible contributions

Yes

No

Taxable upon withdrawal

Yes

No

Your RRSP contributions are tax deductible, which means you can subtract them from the income earned and reduce the amount of income tax you must pay.

RRSP and TFSA withdrawals

RRSP

You must pay tax on any amount you withdraw from your RRSP, whether it is before or during retirement.

RRSPs must be converted by the end of the year you turn 71, but several options are available.

TFSA

TFSA withdrawals are not taxable.

You can withdraw money from your TFSA at any time. However, replacement or re-contribution fees and/or management fees may apply.

Any amount withdrawn from your TFSA is added to your contribution room in the following year so that you can re-contribute it.

For example:

If you withdraw $1,000 this year, the $1,000 will be added to your contribution room the following year.

To help you make sense of it all

Your best ally for all your RRSP and TFSA questions is your financial advisor.

Schedule a meeting to determine which options are best for you.

Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ Insurance cannot be held responsible for any decision made as a result of reading this blog post.