RRSP or TFSA?

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Put money into both if you have the means, experts say

Making plans for retirement, it is beneficial to consider putting money into both a registered retirement savings plan and a tax-free savings account, some financial advisers say. — Photo by Think Stock

—CALGARY

It’s the battle of the acronyms — RRSP or TFSA? They’re both savings vehicles that can help with your tax bill, but which one reigns supreme will depend on your individual situation. In ideal circumstances there would be no showdown — Canadians would sock money away into both, experts say.

But circumstances aren’t always ideal.

“Maybe it’s a quality of life decision or maybe it’s truly just there is not the availability of income or assets to contribute to both,” said John Tracy, senior vice-president of retail, savings and investing at TD Canada Trust.

“Both is a great answer when you can do it.”

An RRSP — a registered retirement savings plan — is, as its name suggests, meant for retirement. Funds can be withdrawn sooner — under the Home Buyer’s and Lifelong Learning plans, for example — but generally this is money that won’t be touched until your golden years.

TFSAs — tax-free savings accounts — are more flexible. They can be used to save for retirement, to be sure. But because that money is easier to access in a TFSA than it would be in an RRSP, it can serve many other purposes.

“It’s starting to pick up a lot more popularity with the younger generation who is not quite geared to thinking about retirement,” said Cleo Hamel, a senior tax analyst at H&R Block.

“They’re more along the lines of thinking of today and what they have planned in their own life — getting married, buying a home.”

You can find out how much you are allowed to contribute to your RRSP on last year’s notice of assessment from the Canada Revenue Agency — 18 per cent of that year’s income to a maximum of about $23,000. Unused contribution room from previous years gets carried over.

The deadline for making a contribution for the 2012 tax year is March 1, so it’s really the only option Canadians have available now to ease last year’s tax bill — RRSPs give the immediate benefit of a tax deduction.

Because there’s a penalty for withdrawing from an RRSP before retirement, tapping those funds is really a “last resort,” said Tracy.

Another deterrent is that once that money is withdrawn, that contribution room is gone for good most of the time.

“In some cases, it makes more sense to borrow money than access your RRSP because the penalty in tax would be so significant,” he said.

From a psychological standpoint, the difficulty in withdrawing from an RRSP can be a good thing for those keen on letting their retirement savings grow.

“I think for real retirement savings, feeling like you’ve locked it in a bit more in RRSPs and leaving it there and letting it compound for a longer period of time can really be quite beneficial,” said Dennis Tew, chief financial officer at Franklin Templeton Investments Corp.

Not taxed

On the other hand, you can take out money from your TFSA any time without being dinged by the tax collector, and that contribution room is restored the following year.

The deadline for contributions is the end of the calendar year, so that ship has sailed when it comes to 2012. For 2013, the limit for contributions has moved up from $5,000 to $5,500 to account for inflation. Like with RRSPs, spare contribution room from previous years is available in the future.

Whether it be an RRSP or TFSA, the money contributed can be invested in mutual funds, stocks, bonds and GICs.

Since RRSP funds are taxed upon withdrawal and TFSA contributions are not, it’s also helpful to think about whether or not you foresee yourself being in a higher or lower tax bracket when you use that money than you are today.

Another factor to consider is what effect RRSP funds will have on Old Age Security, the Guaranteed Income Supplement and other government benefits.

At times, it might make sense to divert some money into a TFSA.

RRSP or TFSA — whichever one Canadians pick, Tracy said, the most important thing is that they do something.

“Create a habit of saving. Start small. Don’t get overwhelmed,” he said.

Organizations: TD Canada Trust, Canada Revenue Agency, Franklin Templeton Investments Corp.Not

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  • a business man
    February 11, 2013 - 11:26

    Personally, I use both the TSFA and RRSP. As long as we live in a society in which certain people are allowed to take more from the government than they put it, most of us will be best served by exhausting every legitimate tax avoidance to the fullest. I even borrow money to put in the RRSP to lower my income tax. With the interest rates so low, it can be profitable to borrow to invest. As long as you end up paying less tax (while factoring in the interest) it will be beneficial. At the end of the day, both the TSFA and the RRSP are great ways of keeping your own money in your own pocket. After all, I doubt may of us get up every day to make money for strangers....we do it for our own families, and the TSFA and the RRSP can allow you to have more for your family.