RRSP vs TFSA: The Case For Using Both

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Tax-time for most of us means finalizing RRSP contributions. As you plan, don’t forget to review the role of Tax Free Savings Accounts. TFSAs are one of the most tax-favoured ways to save. As TFSAs are still fairly new, it’s a good idea to step back, refresh your memory and decide where TFSAs fit in with your overall financial plan.  

TFSA Major Features: 

  • Annual contribution limit carried forward each year 
  • Can be used to house any type of investment, including savings accounts, funds and stocks.  
  • You pay no tax on investment income and/or investment growth.  
  • Withdrawals don’t count as income (though if you withdrawal, you’ll have to wait until the following year to replenish your account). 

Differences from RRSP: 

  • TFSAs operate within the calendar year. 
  • TFSAs are not tax deductible. 
  • If you borrow to invest in TFSA, the loan interest in not tax deductible.  
  • TFSAs withdrawal don’t count as income (RRSP withdrawals are taxed at your marginal tax rate). 
  • TFSA withdrawal don’t affect Old Age Security, or Guaranteed Income Supplement Eligibility (RRSP do impact these income-tested benefits). 

Which is better? 

Both are equally important in my view. In general, RRSPs support long-term retirement savings. TFSAs support short-term savings for major purchases and supplement retirement savings, once you maximize your RRSP. 

TFSA in your overall plan 

While this blog can’t replace personal advice, here’s some general rules of thumb on when to use TFSA as primary or secondary savings vehicles. This is the case in most instances, however, be sure to seek customizable personal advice first.  

  • Primary: TFSA should be your first choice for general savings, home purchase and short-term investment plans. For retirement, it’s primary only if you’ve maximized your RRSP. 
  • Secondary: TFSA should be your second choice for a child’s educations savings, after you use an RESP to maximize the Canada Education Savings Grant. 

Investment mix 

It’s a common misconception due to their name that TFSAs apply only to savings accounts. You can have more than one TFSA and each can contain different investments. TFSAs can hold not only interest-bearing accounts, but funds and stocks as well. The best investment mix for you is based on your personal situation and risk tolerance. Here are some guidelines based on your savings objective:  

  • 1-year timeframe: 100% cash (a high interest savings account, money market fund) 
  • 5 to 10 years’ timeframe: 30% to 50% equity (equity mutual funds) and the balance in fixed income and/or cash 
  • 10+ years’ timeframe: 50% to 70% equity, the balance in fixed income and/or cash.  

We’re constantly evaluating the products and investments out there to save you time. Don’t hesitate to contact us. There is no substitute for a professional opinion.  

Always seek advice before proceeding. 

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