What are the benefits of investing in an RRSP and the TFSA?
You might have questions about what’s the best savings plan for you, and that is perfectly normal. The first thing that you should do is to ask yourself, “Am I saving for the long term or for short and medium term goals?”
Your answer would determine whether you should invest in an RRSP (Registered Retirement Savings Plan) or the TFSA (Tax-free Savings Account).
Investing in an RRSP
If you are thinking about long term investment like at the time of your retirement, RRSP is the best savings plan for you. It provides a tax deduction along with possible tax refund in a financial year.
During this tax season, this can be an excellent option for young families because it can help in decreasing the taxes significantly.
An RRSP allows you to contribute up to 18% of the income earned in the previous calendar year (or based on a Government-set limit) and accumulate unused room of contribution from year to year. The return that you get is tax-free.
You will have to pay tax when you are withdrawing from your RRSP; however, this is likely going to happen at the time of your retirement. So the tax payment will be significantly lower.
Check out the short video below to get a quick idea of the benefits of investing in an RRSP.
RRSP also allows you to withdraw money before retirement based on certain circumstances like buying your first home or going back to school with certain terms and conditions applied.
Investing in a TFSA
A TFSA can be an excellent investment vehicle for short or medium term goals like going on a trip, wedding, or the purchase of a brand new car.
The return from a TFSA is tax-free and the withdrawals are also non-taxable. When you withdraw from a TFSA, your taxable income remains the same and you can recover the room of contribution in the immediate next year.
It is also a great idea to use the TFSA for your retirement savings if you have already used up your RRSP contribution room. Similar to the RRSP, TFSA also comes with a contribution limit – talk to our advisors to know more.
The Bottom Line
An RRSP or TFSA comes with significant tax benefits. The important thing to do is to start early and develop the habit of saving (in any one them or both) as the years go by. Such a systematic approach will help you reach your financial goals faster than you can imagine.
Start today. Talk to our experienced financial advisors about opening a RRSP or TFSA. We can help you chalk out a realistic financial goal based on your needs and budget.