It's this time of year again! What will it be, RRSP ( registered retirement saving plan ) or TFSA ( tax free saving account )?
One thing for sure, either one you chose, your future is already looking brighter.
To help you make the best decision, here are few important facts to consider and some tips to help you decide:
- Tax deductible: contributions reduce the personal income tax you pay.
- Tax sheltered: investments income in an RRSP are not taxed
- Tax deferred: money inside an RRRSP is not taxed until withdrawn
- Non tax deductible : contributions do not reduce your personal income tax.
- Tax sheltered : investment income inside a TRSF is not taxed.
- Tax free : money taken out of a TSFA are not taxed.
Three important questions to answer:
1-What’s your goal?
Saving for a short term goal?
A TSFA may be better choice because withdraws are not taxed.
Buying your first home?
Consider saving your money in an RRSP to use the first -time-home- buyer plan ( HBO). Once your RRSP reaches $25,000.00 from your RRSP ( the limit you can withdraw under the HBP tax free), redirect savings to a TFSA. This way you can withdraw from your RRSP and additional savings from the TFSA also tax free for your new home.
HBP withdraws need to be returned to your RRSP over a maximum of 15 years.
If your goal is long term, say saving for retirement, an RRSP is still a good option.
2 - Are you in a high or low tax bracket?
RRSP contributions lower the income you pay tax on. When your income goes up, so does your personal tax rate.
So if you’re in a higher tax bracket, consider putting your money into an RRSP to reduce taxes.
If you’re in a low tax bracket but think you will be earning more in the future, consider parking your money in a TSFA. In the meantime, carry forward your RRSP contribution room into the future when you get into a higher tax bracket. Then use your TFSA savings to make a sizeable RRSP contribution to reduce the tax you pay.
When you increase your RRSP contribution amount, you can also boost your income tax refund, which can be used to pay off debt.
3 - will you get a big pension?
TFSA withdraws are not considered income and are not taxed as a result.
In retirement, if you have a high income, you may lose or become intelligible for some federal income benefits such as Old Age Security benefit ( OAS).
To provide perspective, the OAS clawback threshold for 2017 is $74,788.
Any income above this threshold reduces the benefits you can get.
If you expect a big pension, put some savings into a TFSA to keep your taxable income low so you don’t risk losing some government benefits.