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Choosing between TFSAs and RRSPs begins with an informed understanding of the benefits and limitations of each one
After years of focusing on RRSP contributions, some expert advice can help unravel the secrets of TFSAs, which may prove lucrative as a complementary or alternative savings method.
Are you better off with TFSAs or RRSPs?
With the addition of TFSAs as a tax-free alternative, deciding between the latter and RRSPs often comes down to individual situations and a rebalancing of savings priorities.
As a simple rule of thumb, a Globe and Mail report notes that RRSPs may make the most sense for those currently earning mid to high incomes, while TFSAs work best for younger Canadians and those nearing retirement age.
According to one financial planner, TFSAs may make more sense for Canadians nearing retirement due to the potential effects that RRSPs may have on entitlements, such as the Guaranteed Income Supplement (GIS).
In fact, many financial planners believe that the flexibility and lack of tax implications offered by TFSAs outweighs RRSPs for Canadians earning less than $108,000.
On the other hand, some argue that TFSAs make it easier for Canadians to dip into their savings, while RRSP withdrawals are taxed as income, making them less attractive as whimsical piggy banks.
However, RRSPs were created as a savings vehicle offering tax deferral until retirement, leading one financial planner to suggest that the decision should come down to an individual’s marginal tax rate (MTR).
An individual’s MTR favours RRSPs over TFSAs in cases where it’s higher at the time of their contribution than it is at the time of their withdrawal.
However, if a choice needs to be made, here are six of the most prominent differences between TFSAs and RRSPs:
- RRSPs are designed to be most effective for retirement savings, while TFSAs can help you meet any type of saving's goal;
- RRSP contributions are tax deductible, while TFSA contributions are not;
- RRSP withdrawals are taxed because contributions are made with pre-tax dollars, while TFSA withdrawals are tax-free because contributions are made with after-tax dollars;
- Once a contributor turns 71, contributions to RRSPs must cease and the account must be used to purchase an RRIF or annuity, but TFSAs have no age limit on contributions;
- RRSP contributions require earned income, but TFSAs do not;
- Both plans allow you to name a spouse as a beneficiary; however, following the death of said spouse, taxes become due on remaining RRSP balances and can eat away at an estate.
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