RRSP and TFSA

Some important differences

February 28, 2017

The newest “old” question we get is, “do we buy RRSPs or TFSAs?” I wanted to share some basic thoughts about both plans and tell you up front, both strategies are good and there is no exactly correct answer. RRSPs are an important retirement strategy that, statistics prove, only one in every two Canadians fund as an investment. Contributing to an RRSP has two main benefits:

  1. Your contribution is tax deductible.
  2. Your contributions grow tax sheltered inside your RRSP. As a result, they have the potential to grow at a much faster rate than funds saved outside an RRSP.

If you are the age of 71 or under and have earned income in the previous year, then you are eligible for an RRSP. Your maximum contribution limit is 18% of your previous year’s earned income up to the maximum level for that year. The schedule of maximum contribution limits is capped at $25,370 for the year 2016. Here’s a chart that will help:

Contacts
Income Contribution Tax Savings
(Saskatchewan)
$60,000 $10,800 $3,561
$91,666 $16,500 $6,728
$100,000 $18,000 $8,354
$105,556 $19,000 $8,818
$111,111 $20,000 $9,282
$116,667 $21,000 $9,746

There are a number of eligible investments for an RRSP. If you have a self-directed RRSP, these investments can include guaranteed investment certificates (GICs), shares of Canadian companies listed on a recognized Canadian stock exchange, bonds, treasury bills, mutual funds, eligible foreign investments, and more.

The TFSA was introduced in 2009 and like an RRSP, it is a savings account. But it is not just for high-interest savings – it can also be an investment account. Like an RRSP it can hold cash, GICs, mutual funds, index funds, ETFs, and more. But here’s the catch. While the TFSA is a tax shelter, it has no tax deduction and it has a maximum annual contribution level of $5,500. Once you are 18 you start accumulating TFSA contribution room and assuming you were 18 in 2009 your maximum as of 2017 would be $52,000.

Since an RRSP is a tax shelter and has a tax deduction, you’re probably thinking that this makes the RRSP superior to the TFSA. But it really depends on your goals and your timing. The downside of the RRSP is that once the money goes into the RRSP, it should likely stay there until retirement. On the other hand, if the $5,000 you put into your TFSA grew to $6,000 and you wanted to take out the $6,000 for anything at all, (house, wedding, business, whatever), you’d pay no tax. The TFSA allows for more flexibility on what you want to do with your money.

Since there are important nuances with each approach, we have a suggestion to make. Think about what you are saving for, and call us for clarification:

Daryl Cooper, Portfolio Manager, Scotia Wealth Management, 306-343-3255.
Colleen Schneider, Wealth Advisor, Scotia Wealth Management, 306-664-1860.