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.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.