With RRSP season gearing up, many Canadians are re-evaluating their investments and wondering what options are best for them. A key part of the analysis is the great debate on what investment tool is better: the Registered Retirement Savings Plan (RRSP), introduced decades ago in 1957; or the newer Tax Free Savings Account (TFSA), introduced in 2009.
"RRSPs and TFSAs are both valuable, tax-advantaged investment tools, each providing unique benefits," said Tina Di Vito, Head of the BMO Retirement Institute. "Depending on an investor's individual circumstances, one might be better suited than the other. It is best to discuss your options with a financial professional who can help guide you in the right direction."
How does a TFSA differ from an RRSP?
Contributions:
Contributions to RRSPs are tax-deductible, while contributions to TFSAs are not.
Contribution room:
With an RRSP, you must have earned income in order to accumulate contribution room.
With a TFSA, you do not need any income to accumulate the $5,000 per year contribution room.
Withdrawals:
Withdrawals from an RRSP are taxed in the year of withdrawal (with the exception of withdrawals made under the Home Buyer's Plan and Lifelong Learning Plan which are not taxed, provided they are repaid on schedule). Withdrawn funds cannot be added to your contribution room in the following year.
Withdrawals from a TFSA are tax-free. Any amount withdrawn is then added to your contribution room in the following year allowing you to re-contribute that amount at a later date.
Conversions:
An RRSP must be fully withdrawn or be transferred to a Registered Retirement Income Fund (RRIF) or annuity by the end of the year in which you turn 71. There is no age requirement to withdraw or close out a TFSA.
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