RRSP versus TFSA
A frequently asked question is whether it is preferable to invest in an RRSP or a TFSA. We would like to receive an answer that is “cut and dry” but that’s impossible since we are all at different stages in our lives and our goals and objectives vary.
To refresh our memories, here is a brief recap of the characteristics of each plan.
RRSP
_ You can contribute up to 18% of your prior year’s earned income to a maximum of $22,000 for 2010;
_ Your unused contribution room is carried forward to the next year;
_ Income and/or gains earned inside your plan are not taxable until they are withdrawn;
_ Withdrawals are taxable;
_ Withdrawals cannot be contributed again;
_ Contributions are tax deductible;
_ Contributions over your limit are penalized after a lifetime over-contribution of $2,000;
_ Contribution deadline for 2010 is March 1, 2011.
TFSA
_ You can contribute up to $5,000 per year;
_ Your unused contribution room is carried forward to the next year;
_ Income and/or gains earned inside your plan are not taxable, ever;
_ Withdrawals are not taxable;
_ Withdrawals can be contributed again, the following year;
_ Contributions are not tax deductible;
_ Contributions over your limit are penalized;
_ Contribution deadline is December 31.
The following link has a comparative chart that I found useful, http://balancejunkie.com/2010/02/02/tfsa-vs-rrsp-duel-who-wins/.
Contributing to a RRSP is a long-term investment and the goal is to withdraw from it at retirement when you will be in a lower tax bracket and pay less income tax.
If you anticipate being in a higher tax bracket at retirement, you may want to consider alternate forms of investment. If that may be the case, please seek the advice of a professional.
You can withdraw from your RRSP to help with the purchase of your first home by participating in the Home Buyers’ Plan (HBP). Under this plan you can withdraw, tax-free from your RRSP to a maximum of $25,000 per couple. Two years after the purchase of your home, you will be required to payback your RRSP completely within a period of 15 years.
You can also withdraw from your RRSP to return to school on a full-time basis. Under the Lifelong Learning Plan (LLP), you can withdraw up to $10,000, tax-free, per year for a total of $20,000 from your RRSP or your spouse’s and you have 10 years to reimburse it.
You can withdraw from your plan at any time but it is preferable to do so when you are in a lower income year such as during a parental leave or a period of unemployment to avoid paying high income tax since the amount withdrawn will be added to your earnings.
The TFSA is great for short-term goals such as saving for home renovations, the purchase of a vehicle, a trip, starting your own business, emergencies, and so on. If you have “maxed-out” your RRSP or are close to your retirement, you should consider investing in your TFSA. It can add-up quickly, $5,000 per person per year, $10,000 per couple per year!
Our goal is to pay the least amount of income tax and the only way to achieve it is to plan. So before you invest in either an RRSP, TFSA or both, establish what your short-term and long-term goals are.
Remember, it’s all about planning!