A Registered Retirement Savings Plan (RRSP) was, prior to 2009, seen as the best way taxpayers could save for their retirement. However, once Tax-Free Savings Plans (TFSA) were introduced, individuals became indecisive about which vehicle to invest into. One would think a TFSA would be more beneficial because of its “no-tax” impact. Well, it is not that simple. Deciding which option reels the most benefit is dependent on your future tax planning.
Here are a few things to consider when deciding which option to choose:
RRSP:
• There is a contribution limit for each taxpayer, each year. If you exceed the limit, CRA will charge a hefty penalty on over-contributed amounts exceeding $2,000.
• You can deduct contributions, up to your allotted limit, from your taxable income. For example, if your gross income for the year totalled $150,000 and you contributed your maximum limit of $20,000 to your RRSP account, you will be paying tax on $130,000 of income rather than the $150,000.
• As contributions into an RRSP are made with pre-tax dollars, withdrawals from the account will be subject to withholding tax.
• The year you turn 71 is the last year in which you can contribute to your RRSP.
TFSA:
• Contribution limit is the same for all taxpayers each year. For 2018, the annual maximum is $5,500. Your limit is also cumulative, meaning you can roll over unused contribution room year to year.
• Over-contributions are penalized by the CRA.
• Contributions cannot be deducted from taxable income.
• Withdrawals from a TFSA account are tax-free, as contributions were made with after-tax dollars.
• There is no age restriction when it comes to TFSA contributions.
If you are unsure of which option would best suit your needs, please consult with your accountant.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.
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