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RRSP or TFSA

On average, Canadians are living longer than ever. The life expectancy for a 65 year-old is age 84 for men and age 87 for women. These numbers point to longer retirements for many Canadians.

A longer retirement, however, presents an interesting planning challenge - saving enough to generate a sustainable income during your retirement years.

RRSPs and TFSAs

Registered Retirement Savings Plans (RRSPs) are among the most popular investment plans in Canada. With the dual benefits of tax deductions and tax-deferred growth, it’s easy to see why Canadians choose RRSPs as their primary retirement savings vehicle.

Introduced in 2009, Tax-Free Savings Accounts (TFSAs) are a newer plan type that offer tax-free growth and significant flexibility. As TFSAs mature and contribution room grows, people are beginning to see the long-term benefits of incorporating TFSAs into their investment plan as soon as possible.

Which Option is Best?

  • There are certain guidelines you can follow to decide whether to contribute to an RRSP or TFSA. Please keep in mind that some or none may apply to you. The best approach is to consult with your financial advisor to decide on the most appropriate option. Your financial advisor can also help you estimate how much money you’ll need in retirement, and what savings and investment strategies will help you generate the necessary income.
RRSPs May Be Better When You:
  • Expect to have a lower income in retirement
  • Earn a significant income
TFSAs May Be the Better Option When You:
  • Expect to be in a higher tax bracket in retirement (for example, if you know you will have a significant pension)
  • Earn a relatively lower income (because RRSP/ RRIF withdrawals may trigger a clawing back of certain government benefits)
  • Plan on withdrawing money before you retire

Conclusion

Whether you invest in an RRSP or a TFSA usually depends on your current and future financial situation, and your long-term goals. Consult with your financial advisor to determine the option for you.



RRSPs and TFSAs at a Glance

  RRSP TFSA
Annual contribution limit 18% of your income from previous year, up to a maximum of $26,230 for 2018 ($26,500 for 2019) 2009-2012: $5,000 2015: $10,000
2013-2014: $5,500 2016-2019: $5,500
Contributions Tax deductible Not tax deductible
Growth Tax deferred Tax free
Withdrawals Taxable: may affect your government benefits such as Old Age Security Tax free: do not affect your government benefits
Withdrawal amounts Contribution room is lost for the amounts you withdraw Added to future contribution room
Unused contribution room Carried forward Carried forward
Spousal plan You can contribute to a spousal RRSP No spousal plans. You can, however, give money to your spouse for his or her TFSA.
Plan termination End of calendar year that you turn 71 years old. Assets are transferred to a registered retirement income fund (RRIF) or annuity. No age limit for contributions
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