RRSP or TFSA ?
When it comes to making a choice between a TFSA or RRSP, many factors come into play and each individual circumstance is a little different. For some Canadians a combination of RRSP and TFSA is the best plan for retirement.
TFSA is after tax income
Your TFSA contributions have already been taxed and there is no tax break comes tax time. It doesn’t matter what your tax rate is when you withdraw, it is all tax free capital gains/interest. Any unused contribution room can be carried forward indefinitely.
You can invest in almost anything through your TFSA, including mutual funds, ETF, stocks, GIC, bonds, etc. Funds can be withdrawn from your TFSA at any time without tax implications and can be contributed back the following calendar year or later without penalty.
RRSP is tax deferred income
Your RRSP contribution is pre-tax income and you will get a tax refund when you file your tax return. All of the money, including the gains/interest in the RRSP will be taxed at your current tax rate when you withdraw. Unused RRSP contribution room can be carried forward from one year to the next without penalty.
You can invest in almost anything through your RRSP, mutual funds, ETF, stocks, GICs, bonds, etc. Funds can be withdrawn tax free with the First Time Home Buyer’s Plan and Lifelong Learning Plans but must be re-contributed back in 10 years for education loans and 15 years for home purchase loans.
Depending on your circumstances, the TFSA and RRSP both offer excellent investment opportunities. While the RRSP remains a favorite in retirement savings plans. Contributing to the RRSP makes the most sense when your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal. The TFSA offers other retirement strategies for high and low income individuals, and seniors nearing retirement. I prefer to use a TFSA, as all money earned and contributed has no tax consequences with lots of flexibility. For high income earners one possibility is to contribute to the RRSP and use the tax deduction to fund your TFSA.
HERE is an article from MoneySense that gives you a good example of RRSP vs TFSA.
Don’t wait for retirement to enjoy life !!