RRSP or TFSA – Which Works for You?

Both are valuable, but in certain circumstances, one may be better than the other.

For years, Canadians have been taking advantage of tax-deferred investment growth in their Registered Retirement Savings Plans (RRSPs). But now, the Tax-Free Savings Account (TFSA) provides Canadians 18 years of age and older with a valuable new opportunity to enjoy tax-free growth. Which one should be your choice?

There is no right or wrong answer. Both RRSPs and the TFSA are beneficial, and what’s best for you will depend on personal criteria. To help you decide, seek professional advice but you can start with considering the following:

Are your savings for short-term or a long-term goal? 

RRSPs were designed primarily to provide for a long-term goal – retirement. Because you get a tax deduction for contributing, withdrawals are usually taxable. (an advisor can help find a strategy that is best for you.)  Best case scenario is if withdrawals are made when you are no longer employed or retired and thus paying less income tax and at a lower rate.

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However, the flexibility of the TFSA, can meet short-term goals more easily. While there is no deduction permitted for the contribution, any amount can be withdrawn, tax-free, at any time for any reason. In addition, you can re-contribute the full amount of your withdrawal in the same year as the withdrawal.

Effective ways to split income with your spouse who pays a lower tax rate than you? 

The TFSA is ideal for income-splitting. You can give your spouse money to contribute to their TFSA and any income earned is not attributed back to you. Your spouse can make tax-free withdrawals at any time.

A spousal RRSP, the contributions you make will reduce the amount you can contribute to your own RRSP. In addition, withdrawals from the spousal plan will be taxed in your hands if they are made in the same calendar year as a spousal contribution or either of the two subsequent calendar years. After that point, however, both the income earned on the initial contribution and any withdrawals made by your spouse will be taxable in his or her hands.

For more information on either of these methods it is always best to seek advice from a Financial Planner.

For more information contact Lawton Partners Wealth Management 306-922-2020