Financial Planning, Retirement Issues


TFSAs vs RRSPs

The TFSA and RRSP are two savings vehicles that Canada has created to help consumers save for their retirement and other expenses in their lives and avoid becoming poverty stricken when they retire or are hit with significant health issues and can no longer work.

TFSA

The TFSA is a Tax Free Savings Account that allows Canadians to deposit into with after tax money and earn income from the 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, 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 design 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 and often generates a tax refund which can be used for any purpose.  Any withdrawals from an RRSP generate tax and are added to the person’s income in the year the withdrawal is made. Deposit maximums are based on the individual’s income and 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of withdrawals than the RRSP since money must be de-registered from the RRSP and generate income tax in the year it is withdrawn.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 TFSA money withdrawn can be re-contributed at any time.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.

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