BY: FAZAAD BACCHUS
This is a question that I am asked many times by clients who are investing through me and for those who are thinking of investing through me. It’s not a very difficult question yet it is a technical question at that. The truth is that both have their place and serve very different purposes, but there are times when it’s advantageous to put money into one and less advantageous for the other.
Lets us further look at this by examining each: A Registered Retirement Savings Plan (RRSP) is one of the most significant savings vehicles in Canada. The main principle behind an RRSP is that you make contributions in your higher income years which will help you reduce your tax liability. For 2018 the maximum contribution is 18% of 2017 earned income or $26,230 (of course you can also count in your past contribution room based on your NOA). If you do not have any more contribution room, but you are earning a large amount you can choose to set up a spousal RRSP if your spouse has the room.
Any growth in your RRSP grows tax sheltered until you decide to start to withdraw. So, you can enjoy the compound growth of your investments without having to pay any taxes on the growth. However, if you make any withdrawals on your RRSP it will be included as part of your total income for the year. So, the main idea here is that you contribute in your highest earning years and you withdraw in your lowest income years. If there is any year that you do not earn employment income, that would be the year to take a certain sum at least equal to your personal allowance as there will be no taxes payable on that amount. In the event of your death, the RRSP value can be rolled over to your spouse tax-free but cannot roll over to your children except a child who has an RDSP.
A TFSA, on the other hand, is a Tax-Free Savings Account which came into effect in 2009. It is the only financial instrument in Canada on which there is no tax on the investment growth. The investments grow the same way as an RRSP as they can be in identical investments, but the RRSP is growing tax-deferred while TFSA is growing tax-free. If you are a low-income person, you might be better off putting your money into TFSA as you will not be saving too much on taxes with an RRSP. The annual contribution max is $5,500 but is retroactive to 2009 where the cumulative value is $57,500. However, if you have an open or nonregistered investment, you would be better off putting that money in a TFSA for already stated reasons. There is no tax penalty for making a withdrawal on your TFSA and your contribution room regenerates.
So, which one is better for you, RRSP or TFSA? The answer is that they are both good and if you can afford to, its best to invest in both. But if you are in the higher income bracket (highest marginal tax rate) you are better off in an RRSP and if you are the lower income, then better to use a TFSA.
