Meiz Majdoub: RRSP vs TFSA – How do you choose?

Meiz Majdoub

Meiz Majdoub

by Meiz Majdoub

The year 2016 is behind us and already speeding up into 2017.  The Registered Retirement Savings Plan (RRSP) season is also gone and one should have completed one’s personal tax return.

At this point in the year, if you haven’t already done so, one must be seriously thinking and planning for the rest of the year.

In this article, I will address the question of whether one should contribute into a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account (TFSA).  Both of these instruments were created by the Federal Government to help us save for our retirement.  The simple fact is we cannot rely on the Old Age Security (OAS) and Canada Pension Plan (CPP) as our retirement income.  This paper will not delve into the reasons why, but will deal with the difference between the RRSP verses TFSA.

What is a Registered Retirement Savings Plan (RRSP)?

  • A RRSP is a registered account that allows you to defer taxes on the growth of your investment.
  • The federal government introduced RRSPs in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.Several legislative changes have occurred over the decades that have encouraged larger RRSP contributions (including extensive amendments to RRSPs effective January 1, 1991).For example, the maximum RRSP contribution limit in 1986 was the lesser of 20 percent of income or $7500. In 1991, the deduction limit was increased to $11 500 and $15 500 in 2005, after which it was indexed. The maximum RRSP contribution limit for 2017 is $26,010 or 18% of earned income.

What are the benefits of an RRSP?

  • Contributions are tax deductible
  • Immediate tax benefits-Depending on your tax bracket
  • Income earned in your RRSP is not taxable.
  • By the time you start withdrawing your RRSP funds, you will most probably be in a lower tax bracket
  • Special features allows you to use RRSP for other uses:
    • Home Buyers Plan (up to $25K) payback1/15 beginning 2 years after withdrawal.
    • Life Long Learning – withdraw up to $10K to a total of $20K, finance full time training or post-secondary education. 10% to be paid back yearly.

When Should I Start?

  • The earlier you start the better
  • The longer your savings grow within a tax-sheltered structure like an RRSP account, the more you benefit from the effects of compound investment returns.
  • Contributions may be deducted in the calendar year that they are received, and can be carried forward
  • Contributions made during the first 60 days of the calendar year may be claimed in the year made or previous year.

What is a Tax Free Savings Account (TFSA)?

  • The TFSA is an account that provides tax benefits for saving in Canada. Contributions to a TFSA are not deductible for income tax purposes. Investment income, including capital gains and dividends, earned in a TFSA is not taxed, even when withdrawn.

TFSA Contributions

  • Your TFSA contribution room is the maximum amount that you can contribute to your TFSA.
  • Starting in2009, TFSA contribution room accumulates every year, if at any time in the calendar year you were 18 years of age or older, have a valid Canadian social insurance number and are a resident of Canada.
  • You will accumulate TFSA contribution room for each year even if you do not file an income tax and benefit return or open a TFSA.
  • The annual TFSA dollar limit for the years2009 2010 2011 and 2012 was $5,000 .
  • The annual TFSA dollar limit for the years2013 and 2014 is $5,500, and $10,000 for 2015. $5,500 for 2016 and thereafter.
  • The maximum available room is $52,000 Cumulative, including 2017- So if you have never contributed into it and you have funds in a non-registered savings plan, see your Advisor.
  • Investment income earned by, and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years
  • Withdrawal contribution room is reinstated the year after withdrawal

Benefits of a TFSA

Seniors & Low income investors

  • Unlike RRSP, contributions can be made after age of 71
  • Tax free income doesn’t affect eligibility for government benefits (OAS, GST etc)
  • Use for Emergency Savings

 

TFSA vs. RRSP

TFSA                                                                    RRSP

Tax Deduction on contribution

NO                                                                     YES

Tax Sheltered growth

YES                                                                     YES

Tax free withdrawals

YES                                                                    NO

Affects some gov’t benefits

NO                                                                     YES

 

WHICH is BETTER, a TFSA or RRSP

 

Should a TFSA complement or replace my RRSP?

  • If the marginal tax rates at deposit and withdrawal are the same.
  • The TFSA and the RRSP are equally effective
  • If the marginal tax rate at withdrawal is lower than at contribution.
  • The RRSP wins
  • If the marginal tax rate during withdrawal is higher than at contribution.
  • The advantage goes to a TFSA
  • If general income is high into retirement
  • Advantage goes to the TFSA

 

About the writer

Meiz Majdoub, a financial professional with over 30 years of experience and accredited with a CLU, CH.F.C, and member of Conference for Advance Underwriters (CALU).  He is also a member of  the Estate Planning Council Of Ottawa. He  has helped individuals, organizations and corporations attain their goals in the areas of Financial & Estate Planning, Insurance, Living Benefits and Employee/ Group Benefits. He can be reached at: 613-749-4007, or meiz@majdoub.com

 

 

 

 

 

 

 

 

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