I've written a fair bit about the importance of saving for retirement and specifically on both the topic of Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs). Now, I'm focused on sharing the differences between RRSPs and TFSAs.
Like supportive teammates on a winning sport's team, both savings vehicles make for great contribution methods. Depending on the individual's specific needs, income level, and stage of life, one may be a better option than the other. It really depends.
Many Canadians are familiar with RRSPs as they have been around 1957. TFSAs are the new kid on the block. They've only been on the scene since the 2008 Federal Budget. As the new player, they are not as top of mind as RRSPs tend to be.
Ideally, if you've met with a trusted financial advisor, you will be encouraged to invest in both an RRSP and a TFSA. Not many folks have extra cash hanging around, but with some smart savings goals or when the occasional windfall happens, it is helpful to understand the differences as well as pros and cons of these two heavy savings hitters.
When it comes to RRSP contributions, the limits continue to increase on an annual basis. In 2015, the allowable contribution is 18% of your earned income from the previous year to a maximum of $24,270 for 2014, $24,930 for 2015 and $25,370 for 2016. The allowable contribution is deducted from the gross taxable income for the year, which may lead to a nice tax refund that could potentially be put into a TFSA. RRSPs create a tax deferral. Basically, the payment of income tax is shifted until retirement when forced annual withdrawal amounts are required after age 71.
Turning our attention to the TFSA, it can be described as an all-purpose savings vehicle that can be used for any savings goal. Canadians are able to invest up to $5,500 annually and may carry-forward any unused contribution room. Investment growth that happens in the TFSA is tax sheltered whereas the annual contributions are not.
A helpful feature of the TFSA is that withdrawals don't incur tax and the full amount of a withdrawal can be resubmitted into the TFSA in future years. In addition, TFSA amounts don't affect the eligibility of federal income-tested benefits like Old Age Security. When the saver turns 71, he isn't required to withdraw any money from the TFSA. This becomes an attractive savings option for seniors.
Whether you're looking for help with understanding RRSPs or TFSA or another retirement savings vehicle, our team is well positioned to address your questions. We can show you how to maximize your plan member's savings opportunities and mitigate the risk of unwanted financial surprises such as unexpected tax deductions. Contact us. We're here to help so you can focus on what you do best.
With the deadline for Registered Retirement Savings Plan (RRSP) contributions for the 2013 tax year directly ahead of us on March 3, 2014, it is timely to consider both the value of an RRSP and Tax Free Savings Account (TFSA).
RRSPs took the main stage back in 1957 when they were first introduced by the Canadian government. It wasn't until January 1, 2009 when TFSAs were established.
According to Statistics Canada, less than one in three eligible Canadian tax-filers contribute to an RRSP. A similar situation presents itself with TFSAs. According to an ING Direct Survey, 53 percent of Canadians haven't opened a tax-free savings account (TFSA) because they feel they don't have the money to open one. The survey results also indicate that 42 percent of Canadians aren't planning to open a TFSA in 2014.
A survey by BMO Bank of Montreal indicated that there are more Canadians in 2013 (48 percent) who opened a TFSA than in 2012 (39 percent). TFSAs experience higher adoption rates in British Columbia, Alberta and the Prairies (all over 50 percent) whereas comparatively, the weakest adoption rates are in Atlantic Canada (34 percent). Canadians primarily open TFSAs as a vehicle to help them save for retirement as well as a source of funds for emergency situations.
According to the latest BMO study, more Canadians have an RRSP at 67 percent than have a TFSA at 39 percent.
The ING Direct Survey found that 31 percent of Canadians agreed that they don't understand the value of a TFSA or are familiar with the rules. The BMO survey cited that only 19 percent of respondents knew the contribution limit was $5,500 and only 11 percent identified all six types of eligible investments within a TFSA.
The value of a TFSA includes not paying tax on the earnings in the account as well as its flexibility -- there are no penalties for withdrawing money. Canadians who open a TFSA also have the ability to carry over unused contributions.
Knowing about TFSAs and how they are taxed is important. Understanding contribution thresholds help to avoid over contributing and any complications that come with a lack of awareness of the specific TFSA rules.
If you are looking for ways to engage employees about the benefits and features of a TSFA or an RRSP as a savings tool, please contact us. We're hear to help so that you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.