TFSA or RRSP?

By William Burns, Financial Adviser

Which is best for you?

That depends on your individual situation. Basically, a TFSA or Tax-free Savings Account is an account that can save and earn interest and you don’t have to pay tax on any of the money you earn. You can also withdraw any of your money at any time and you don’t have to pay any income tax. There are limits of how much you can deposit though. The deposit you can put in total right now is 69,500.00 or 6,000.00 per year.

An RRSP or Registered Retirement Savings Plan is an account that you can deposit and earn interest without paying income taxes until you withdraw the money later. Any amount you deposit in that calendar year you can then deduct off your income totals and thusly receive some of the money you paid in income tax back. For example; if you deposit $5000.00 in a year to your RRSP you could get back $1250.00 back on your tax return. Simply, you can defer the income tax you would pay on that and earn interest for years and not pay taxes until you withdraw. If you don’t pay income tax, then an RRSP is not for you, except in a spousal RRSP.

If the spouse with the higher income deposits into an RRSP in the name of the lower income, then the higher income gets more on their tax return for that year and when the lower income withdraws the money, their tax rate is lower, so they pay less tax. This spousal RRSP can be advantageous for the couple.

You can also borrow to buy an RRSP. If you are in a Marginal Tax Rate of 30% and borrow $10,000.00 to buy a $10,000.00 RRSP you could receive $3,000.00 on your tax return. Therefore, you have an asset of $10,000.00 (RRSP) and an expense of $10,000.00 (loan) meaning your net worth is 0. But, the $3,000.00 you earn on your tax return results in you now having a $3,000.00 net worth! The cost of the loan interest is usually offset by the interest earned on your RRSP.

As I mentioned earlier, a TFSA or an RRSP depends on the individual needs and circumstances. Everyone is different. Don’t forget that you are only allowed to invest in an RRSP as indicated on your previous year Notice of Assessment. Your allowable RRSP Limit is 18% of your annual gross income.

Be careful, over contributing to your TFSA or RRSP could mean tax implications. You want to have all the facts and always ask for advice. Remember, it’s your money!

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