Let’s consider the pros and cons of each investment saving option to help you decide the best way to invest your hard-earned dollars.
RRSP Pros: RRSP contributions provide you with a tax break when you file your income tax return, and the money invested grows tax-deferred until you begin withdrawing funds. If you get a tax refund, invest it as well and get even further ahead.
For people in a higher tax bracket, getting some of your tax dollars back can feel good while you defer taking funds out until you are retired and in a lower tax bracket.
RRSPs offer a good place to hold USA based investment options. This is due to the tax treaty between the US and Canada when it comes to dividend taxation.
As most Canadians still earn more while working than retired, maxing out their RRSPs should probably be their first priority.
RRSP Cons: This is a tax-deferred investment, so if you are fortunate enough to have a great pension, you may end up in the same or higher tax bracket at retirement.
At age 71, you are required to convert your RRSP to a RRIF and begin receiving income.
You can’t withdraw money tax-free except for buying a first home or going to school, and that money must be paid back into your RRSP over a specified time. If you are in a low income tax bracket, most times you may be better off to invest in a TFSA.
TFSA Pros: This is a flexible option that allows you to invest and withdraw funds out easily and without tax penalty. It’s easy to figure out how much to withdraw in retirement as there are no tax consequences.
Unlike RRIF withdrawals, TFSA withdrawals are not treated as income so they don’t affect pension-adjusted benefits such as Old Age Security payments.
Just as with RRSPs, your TFSA savings can compound tax-free which can make a huge difference if you start at an early age. Remember that it’s not timing the market that makes you wealthy, its time in the market that matters.
TFSA Cons: You don’t get a tax reduction on your annual income tax return.
Withdrawals from a TFSA are easy, so for some the temptation may make it difficult to stay invested for the long term.
In conclusion: Both TSFAs and RRSPs can be professionally managed with a wide range of investment options to choose from.
Unfortunately, many Canadians believe that savings accounts or GICs with their relatively low returns are the only investment option for TFSAs. TFSAs can be held in everything from GICs, savings accounts, mutual funds to segregated funds. They really should be called Tax-Free Investing Accounts.
If your employer offers pension matched RRSP contributions definitely take the free money! But you should also contribute on your own to a TFSA for your short-term savings goals such as saving for a car, a future baby, a trip, or if you’re not in a high income tax bracket.
The reality is that we all have different saving and investing needs and goals. A program that is ideal for one individual may not be the best for someone else, so it’s best to sit down with a trusted financial professional and discuss what’s best for you. Then you can decide how you should allocate your hard earned money.
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