Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)? According to Orlando Ali, an Etobicoke based managing director with Desjardins Financial Security Independent Network, it's all about the tax. First, let's review the main features of this tax-free registered savings account:
How much can I put into my TFSA? Starting this year, you can now contribute up to $5,500 for 2017. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn't a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It's also worth noting that your withdrawals won't compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.
It's a great retirement savings tool: If you've successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, within your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won't reduce your taxable income, you won't receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP.
"By contrast," explains Orlando, "Any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income."
"If you could afford to, contributing to each year's maximums in both plans would be ideal," advises Ali "Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals."
To learn more about the differences and benefits of the RRSP and TFSA, speak to any one of our financial advisors.Orlando Ali Jr Director of Sales and Business Development Desjardins Financial Security Independent Network 416-458-7883 email@example.com
This article is for general information purposes only and should not be construed as insurance, investment or tax advice. The information contained herein is based on sources and materials believed to be reliable, but are not guaranteed.