Let me ask you this; is a Registered Retirement Savings Plan (RRSP) really the best savings plan for you? With RRSP, contributions are tax-deductible, and growth with gains is also tax-free. You will only be subject to tax when you take money out and the incurred taxes will be calculated based on your income tax rate during the time of withdrawal. Contributions of up to 18% of your earned income in the previous year, up to a maximum of $22,000 can be made with your RRSP. Adjustments will depend on the pension plans that you have and on your carry-forward of unused RRSP contribution since the year 1991.
RRSP is registered with the Canada Revenue Agency. For many years it has been the best savings vehicle made available for the average Canadians. But in 2008, the Canadian government introduced a new savings plan and that is the Tax Free Savings Account or TFSA.
With a TFSA, Canadians are allowed to contribute up to $5,000 annually to the account. Unused contribution room with TFSA can also be carried forward but contributions will not be deducted from tax.
Advantaged of TFSAs
The advantage of TFSA over RRSP is the unique tax incentive that it offers the account holder. Let’s put it this way. For example your $5,000 contribution doubles up over time; with TFSA you can withdraw the full amount ($10,000) without paying any taxes.
Also with this savings account, your eligibility for federal income-tested benefits and credits will not be affected by either the income earned with your TFSA or the withdrawals from it.
Choosing the Best Savings Plan
There is a general rule that an RRSP is best with individuals who belong to a high-income bracket. And if you belong to a lower income bracket, a TFSA is a better choice because of the flexibility that it offers. But before anything else, before you decide which savings plan is best for you. It is best to have a word with registered investment advisors.
As an investment strategy of some Canadians, they invest heavily on their RRSP and use the tax refund from it to fund their TFSA. So you get the best of both worlds by doing this.
Like the best instant access savings accounts, TFSA offers the same feature. “It can be used as a rainy-day fund to save for a multitude of uses in one account which helps clients reach their goals sooner, with the option to withdraw funds when needed.”, says Anna Sorensen, Branch Manager of ScotiaBank Coventry Hills.
Before seeking investing advice you might want to check out first the TFSA vs. RRSP calculator if you want to get hands on experience on how to determine which savings account is best for you. You might also need the idea of paying yourself first. Because if you wait every month to see how much money you can save, you might end up not contributing at all. Setting up automatic bank withdrawals will be very effective in these cases.
It is very important that we save up for our future. Everyone must invest in their future because no one else will!