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RRSP vs TFSA – Here’s What You Need to Know

ON February 22, 2016

Still can’t decide between a TFSA and an RRSP? Well, you are not alone. With the media and personal finance blogosphere ablaze, constantly fueling the debate over which one is better, figuring out the best place to invest your retirement dollar is not an easy choice.

Without a doubt, both are great saving tools. But if you are like many Canadians, you are probably a little (or a lot) confused about how both of these programs work. That’s why we thought it would be a good idea to hammer out some of the specifics of each plan, in the hopes of helping you nail down which one is the best option for you.

So let’s get started.

The RRSP Basics:

  • RRSP is a registered plan for sheltering taxable income.
  • An RRSP can hold several investments, including GICs, stocks, mutual funds, and bonds.
  • You get a tax deduction for contributing to an RRSP.
  • When you contribute to the RRSP, it is with pre-tax income.
  • You will have to pay tax once you take funds out of an RRSP.
  • You are expected to contribute to an RRSP to gain the tax deductions when you’re at a higher tax bracket, and take it out when you are at lower tax bracket.
  • You can borrow money from your RRSP for a down payment on your first home (Home Buyers Plan) or to pay for full-time or part-time education or training expenses under the Lifelong Learning Plan (LLP).
  • You can’t use your RRSP investments as collateral for a loan.

The TFSA Basics:

  • The TFSA is a registered plan for sheltering taxable income.
  • You can contribute $5000 per year to a TSFA after the age of 18.
  • You don’t get a tax deduction for contributing to a TSFA.
  • Similar to an RRSP, a TFSA can hold GICs, mutual funds, stocks, and bonds.
  • Money contributed to a TFSA is after tax income; however, you can take out money that has been compounding tax-free.
  • You don’t pay taxes when you take out money from a TFSA.
  • You can use your TFSA investments as collateral for a loan.

Whether you are a business owner or not, most people are going to have different reasons for choosing one plan over the other. Before you make your decision, it is always a good idea to sit down and discuss the merits of each option with a professional accountant.

Contact BCJ Group, Chartered Professional Accountants for a free consultation today!

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