With the launch of the TFSA (Tax Free Savings Account), a common question is which one is better, the TFSA or the RRSP (Registered Retirement Savings Account)? I have seen both TFSA and the RRSP win the title of “the best”, so which one is it?I believe they both have slightly different benefits and depending on your situation and use, either or both could benefit you. These two options both give you a limit on contributions, both allow your investments to grow without tax on the growth or income generated and both have a long list of different investment options. The biggest difference is when you receive the tax benefits or with RRSP’s the tax bill.
With a TFSA when you contribute there is no tax benefit, the money grows tax free, but when you pull the money out it is all tax free.
With an RRSP when you contribute you can deduct the contribution from your taxable income, but when you pull the money out the entire withdraw is taxable.
For short term savings the TFSA makes more sense. For long term savings they can both work. To maximize the benefit a general rule is if you will have more money in retirement the TFSA may work better. If you will have a smaller income in retirement then the RRSP will likely be the better option. It is also important to remember it is not RRSP or TFSA question, in many cases using them both for different reasons makes the most sense.
Whichever you choose, saving money and building net worth will only make your financial life easier. Saving with the wrong option is better than not saving at all.
This post has been kept general, to find out if an RRSP is right for you, it is advised that you seek a professional opinion. Details on RRSP’s can be found on the Government of Canada website. This information is assumed correct, but is for information purposes only and it is up to the reader to verify it’s accuracy before acting on anything written on this site. More details about the use of the content can be found on the site disclaimer located under the “Getting to know us” tab. We do not offer any tax or legal advice.
This entry was posted on Tuesday, February 16th, 2010 at 9:53 am and is filed under Financial. You can follow any responses to this entry through the RSS 2.0 feed.
