A very common question we hear from our clients is: should I have an RRSP (Registered Retirement Savings Plan), a TFSA (Tax Free Savings Account), or both?
To help address this question this blog will discuss how far $1,000 will go when you’re comparing a Tax Free Savings Account and a Registered Retirement Savings Plan, and which option is best for you.
There are a few things to consider, but as always it depends on your individual circumstances!
The initial tax credit available on RRSP deposits make them appealing to most people initially. As well, the money in an RRSP grows tax deferred so you benefit from compounding growth. There are, however, restrictions on how RRSP contributions can be used, mandatory minimum withdrawals in retirement and tax on the balance at death if not rolled over to a spouse.
As well, once you reach retirement your RRSP will have to be converted to a RRIF (Registered Retirement Income Fund) and you’ll begin to withdraw money in the form of income. The higher your net income in retirement the more income tax you’ll likely pay when withdrawing money from your RRIF.
There are, unfortunately, no tax credits when you make a deposit into a TFSA. However, the money in your TFSA grows tax free which means any income taken from a TFSA is not considered taxable income. This feature of a TFSA can be helpful if your expected income in retirement is already high as a result of pensions or other income sources.
All things considered, both an RRSP and a TFSA play a useful role in retirement income planning. Take a look at the “Journey of $1000” infographic for more insight into the use of a TFSA over an RRSP, or vice-versa:
View Full Sized Original Image: http://blog.wealthbar.com/wp-content/uploads/2015/02/WealthBar_RRSPvTFSA.png
View Wealthbar.com Blog: http://blog.wealthbar.com/tfsa-vs-rrsp-the-journey-of-1000/