The TFSAs vs RRSPs are two savings vehicles that Canada has created to help consumers. They can save for their retirement and other expenses in their lives. It helps avoid becoming poverty-stricken when they retire. Or are hit with significant health issues and can no longer work.

TFSAs vs RRSPs

TFSA

The TFSA is a Tax Free Savings Account that allows Canadians to deposit into with after tax money. They can earn income from investments also tax free. Canadians can withdraw money from the TFSA at any time and not pay tax on that income. Consumers may invest in bonds, GIC’s and mutual funds. As of January 1, 2013 Canadians can contribute a maximum of $5,500 annually to the TFSA. This is a great way to save money with after tax dollars. Also generate income and not have to pay income tax on the income.

RRSP

The RRSP on the other hand is a Registered Retirement Savings plan. It is designed  to reduce the total tax paid by Canadians since contributions are made with before tax dollars. A deposit to a RRSP has the effect of reducing the person’s income for tax calculation purposes. It often generates a tax refund which can be used for any purpose.  Any withdrawals from an RRSP generate tax. This income adds to the person’s income in the year the withdrawal is made. Deposit maximums are based on the individual’s income. Also the investments can be in bonds, mutual funds, GGIC’s and stocks in a self managed RRSP.

TFSAs vs RRSPs

Which Investment Should Be Considered

Investors who can maximize the contributions to both investment vehicles should probably do so, unless they happen to have a mortgage that needs to be repaid or other debt. Studies have been conducted that show that both the TFSA and the RRSP generate almost identical amounts of after tax savings for the same set of assumptions over a longer period.

Withdrawals and Impacts on Government Plan

The TFSA offers more flexibility in terms of withdrawals than the RRSP since money must be de-registered from the RRSP and generate income tax in the year it is withdrawn. The TFSA does not generate any added tax and it also does not affect government plans such as the GST/HST Credit, the Canada Child Tax Benefit and the Working Income Tax Benefit. TFSA money withdrawn can be re-contributed at any time.

Seniors who are  currently living on RRSP or RRIF withdrawals find that even modest withdrawals from these plans upon retirement affect the retiree’s eligibility for income-tested government benefits and credits, such as the Guaranteed Income Supplement (GIS), Old Age Security (OAS) benefits and the Age Credit. Withdrawals from a TFSA are not considered to be “income and they have no impact on the amount of GIS or OAS received nor will such withdrawals reduce the Age Credit.

Seniors should meet with an adviser and discuss the best course of action regarding how to proceed with their RRSP and TFSA planning to minimize tax and to also make sure that other government plans are not impacted.

Quality of life during retirement is really the issue that everyone is looking for. We all have different visions of what that might be. Individual Retirement Accounts topped up each year can help to achieve these objectives. These visions are based on our upbringing. Also where we live and many other things that have happened to us as we shaped our lives. Some people will have corporate or company pensions to rely on. It is usually never enough. That is why we happen to think that individual retirement accounts are just as important for someone with a pension as it is for someone who does not have a corporate pension.   For self-employed people an individual retirement account is even more important.

Individual Retirement Accounts – Areas to Focus On

Manage Risk

It is all about managing risk over the long term. Investing in quality stocks and mutual funds as well as bonds, while maintaining diversity can be a recipe for success. Growth and income stocks and mutual funds over the long term will help to ensure that your retirement plan is sizable and meets your objectives for retirement.

Self Employed

If you are self-employed it is possible that you will be able to sell your business when you retire. However, sometimes plans do not always turn out the way you think. Your company may not be worth as much as you hoped it would. Or it might even go bankrupt leaving you high and dry when it comes to retirement. Build an individual retirement plan account to give yourself that extra bit of insurance. If your business does well, you will even be better off!

At the very least it will help you top up pension from your company or from your business when you sell it. Having s secondary plan for retirement is just good business sense.

Need to Manage

Just like a business, the retirement account must be managed. You may decide to use a financial adviser, however, we urge readers to be very involved and to make informed decisions every time your adviser recommends something. Review your portfolio once per month or at a minimum once per quarter. Set up review sessions with your adviser at least twice a year to make course corrections in terms of your investment balance and diversity.

Diversity

We have all heard of people who had all of their retirement with one company, only to find that the company goes bankrupt and they lose everything. Regardless of how loyal or strongly you feel about a particular investment, always diversify your investments so that your risk level does not place you in a position to lose your total investment. In addition, use several investment advisers and test investment scenarios against both of them before making a decision.

Focus on Growth, Income and Balance Investments

High growth stocks can go up fast and they can descend fast. Growth & income stocks will generate income for your retirement plan as well as there is potential for growth in the value of the stock. These are usually the best stocks to follow over a long period of time. Maintaining a balance of investments across various industries will also provide diversification and protection from downturns in one economic segment or another.