RRSP’s and TFSA’s both have a place in retirement planning!
The Walton Financial Group in Barrie, Ontario has investment advice related to Registered Retirement Savings Plans and Tax Free Savings Accounts
The question is a fundamental one all advisors have to address as they help their clients with their investment accounts.
RRSPs offer a tax deduction when you contribute but you pay tax when money is withdrawn. On the other hand, TFSAs offer no upfront tax break but you don’t have to pay tax on withdrawals. Both accounts help you reach your savings goals faster than a regular savings account because both grow tax-sheltered.
The key difference between a TFSA and an RRSP is that a TFSA is a tax shelter; that is, no taxes will be payable on investment gains. An RRSP is a tax deferral; taxes will have to be paid on investment gains, but only when funds are withdrawn. Of course, the RRSP has the added sweetener of a partial tax refund when clients make the contribution to the fund. But how to decide between the two?
TFSAs have been taking gradually from RRSPs in terms of investors’ choice for their dollars. A key reason is lifetime contributions can now be as much as $81,500 per person – twice that amount for a married couple.
People shouldn’t just contribute to their RRSPs just for the sake of doing so, but only when it’s likely that they’ll be in a lower tax bracket in retirement.
A sensible plan is to focus on current income as a starting point. If the client is earning $55,000 a year or less, contributing to a TFSA is a good option.
Another idea contribute into their RRSPs and when they get a tax return because of the RRSP deduction, they put those funds into their TFSAs.
It is important to the tax-sheltered compounding that RRSPs provide. In a non-registered investment account, tax is a near- and long-term annoyance. Dividends and interest are taxed in the year you receive them, and capital gains for a stock or fund must be calculated using the adjusted cost base. This can get complicated if you buy and sell shares frequently or you own investments paying a return of capital.
The most effective approach to answering this question about RRSP’s or TFSA’s is to set up a meeting with a financial advisor at the Walton Financial Group in Barrie, Ontario.
