It’s that time of the year again and the question remains…”am I better off investing in my Registered Retirement Savings Plan (RRSP) or my Tax Free Savings Account (TFSA)”?
Here are a few important elements to consider when faced with the choice:
First consider your marginal tax bracket.
Investments made in your RRSP are tax deductible. If your annual income is high and you have the possibility of investing in your RRSP, this might be a better option in order to reduce your taxable income for the year. TFSA contributions are not deducted from your annual income.
The second factor to consider is the contribution limit.
The TFSA has a contribution limit of 6000$ for 2021 and the contribution amounts are cumulative since its creation in 2009. This means, assuming you were 18 years of age at the time and have been living in Canada, your lifetime contribution room is 69,500$ in 2020 and 75,500$ in 2021. RRSPs have a carry forward value of unused contribution room. RRSP contribution limit for 2020 is 27,230$. If you are unable to contribute the maximum amount, the difference is carried forward to next year.
Third factor and an important one, are the withdrawals.
RRSPs are retirement vehicles that have a tax penalty schedule depending on the amount being withdrawn. Contributions can be made until the age of 71, at which point RRSPs have to be converted into Registered Retirement Income Fund (RRIF). TFSAs do not have any withdrawal taxation and the amounts withdrawn can be added to the contribution limit in the following year. Furthermore, TFSAs do not have an age limit or conversion requirement.
In conclusion, both Investment choices have the advantage of increasing in value tax free. There are contribution limits on both and over contributing bares a hefty fine (1% per month). The differences involve the possibility of withdrawals and the differed tax timeframe.
For further details contact your Rothenberg advisor.