RRSP or TFSA? That is the question!

Ever since the tax-free savings account (TFSA) came on the scene in January 2009, some investors have been faced with a new dilemma; is this new type of tax-efficient plan better than an RRSP when it comes to saving for retirement? Two important factors that should influence your decision are why you’re saving and what your tax rate is.

“The TFSA is a savings account to be used for various projects. Its main advantage is that investment income earned in the TFSA account is not taxable, even when it’s withdrawn. Because it allows you to access the funds at any time without triggering a tax effect,* the TFSA is useful for both short- and long-term projects. Moreover, by consulting the MyIdea tool, available at nbc.ca, you can find out how much you should be saving periodically in order to accumulate the funds you need to carry out your plans,” says Martin Pouliot, branch manager in Laval.

“The RRSP is primarily intended for long-term projects, especially retirement.1 The returns generated are tax-sheltered until they are withdrawn. In other words, taxation is deferred. Unlike the TFSA, contributions made to an RRSP are deductible from taxable income. So the RRSP is beneficial if the tax rate on withdrawals from the account is lower than the deduction rate when you contribute. RRSPs are therefore favourable for most people, since their income after retirement is usually lower than during their active professional life,” says Christian Gelinas, financial planner at National Bank in Laval.

Contributing to an RRSP offers significant tax benefits but also has repercussions on social security programs that taxpayers are entitled to, such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). So for some investors, especially GIS beneficiaries, it may be more favourable to make withdrawals from their TFSA. Be sure to make the decision that’s right for your situation! If needed, consult your advisor who can enlighten you, or visit nbc.ca/investment to learn more.