RRSP vs TFSA

Brian Blair |
Categories
Education

RRSP VS TFSA

Having wrapped up RRSP and tax season for the year, it seems like an ideal time to address some common questions that we receive around RRSP and TFSA benefits, drawbacks, and general differences between the two. Since we have many clients with children and grand-children, we also believe this will be good information to share with young-adult family members, friends, and those who are approaching adult age. Since we know that time in the market is the biggest factor in achieving long-term financial goals, sharing this information, increasing the financial literacy of the youths in our lives, might be the encouragement needed to start contributing to their own future financial goals and security throughout their lives.  

RRSP and TFSA accounts are not investments in and of themselves, they are registered accounts in which to hold investments, specifically for the tax benefits. There are many investment options to be held within an RRSP and/or TFSA - including mutual funds, portfolio funds, stocks, bonds, ETFs etc. The bottom line is really to take advantage of the tax-free (TFSA), and tax-deferred (RRSP) status of any growth accumulated over time. We call RRSP and TFSA accounts “registered” because they are accepted by the CRA to be registered under the Income Tax act to receive tax benefits. Both the RRSP & TFSA account registrations are very useful and beneficial, but different rules apply.

Here are the basics of what you should know:

RRSP (Registered Retirement Savings Plan) Things to Know

  • Each Canadian can contribute up to 18% of their previous tax year’s earned income, up to an annual maximum set by CRA, which is indexed annually.
  • What this means:
    • If you earn $50,000 per year, you can contribute $9,000 (18%) annually to an RRSP.
    • If you earn $200,000 per year, you can contribute the annual maximum ($29,210 for 2022) annually to an RRSP.
  • We also have the option of contributing to a spousal RRSP, in which case the contributing spouse (generally the higher income earner) can contribute to an RRSP dedicated to their spouse’s future retirement income, while benefiting from the tax deduction for themselves in the year of contribution.
  • Our RRSP contributions and any accumulated growth can remain in tax-deferred status until the year we turn 71, at which time the RRSP must be converted to a RRIF (Registered Retirement Income Fund) and we must start drawing an income from the RRIF by the year we turn 72. The minimum annual income that must be taken once we convert to a RRIF is determined by the CRA using a formula of either our own, or a younger spouses age on December 31st of the prior year, and the dollar value of the RRIF at the beginning of the current year.
  • There are programs in place to “borrow” from your RRSP for the purpose of either purchasing a home under the Home Buyers Plan, or for education purposes under the Life-Long Learning Plan. However, withdrawing funds from your RRSP for any other purpose will be subject to a withholding tax and will be considered income for income tax purposes in the year of withdrawal, and you will not get this contribution room back the following year.   
    • Withholding tax on RRSP withdrawals (in every province excluding Quebec) are:
      • $0-$5,000 = 10% withholding tax
      • $5,001-$15,000 = 20% withholding tax
      • Above $15,000 = 30% withholding tax

TFSA (Tax Free Savings Account) Things to Know

  • The TFSA program started in 2009 as a way for residents of Canada, 18 years of age or older with a valid SIN number, to save and invest money with tax-free growth.
  • TFSA annual contribution room is the same for every eligible Canadian resident and is not tied to annual income. The current annual contribution amount is $6000.
  • Neither TFSA contributions nor withdrawals need to be reported on your tax return. The contributions made to a TFSA are made with after-tax dollars, so do not offset any income, and any withdrawals made are totally tax-free, so are not subject to withholding tax.
  • TFSA registration does not expire and there is no age that you are legally required to start withdrawing. You can continue to contribute to a TFSA for as long as you want to without ever having to worry about minimum withdrawal amounts, or additional taxable income. The growth truly is “free” money.
  • You can find out how much TFSA contribution room you have available through CRA, however the chart below shows the contribution limits year by year.
    • 2009-2012 = $5,000 each
    • 2013-2014 = $5,500 each
    • 2015 = $10,000 (Federal election year)
    • 2016-2018 = $5,500 each
    • 2019-2022 = $6,000 each

An important benefit of both the RRSP and TFSA is our ability to name one or more beneficiaries or name a spouse as successor annuitant or successor holder to these accounts. If a beneficiary is named, the holdings of the accounts bypass probate and the proceeds are paid directly to the named beneficiary. If a spouse is named as successor annuitant to an RRSP or successor holder to a TFSA, this allows the accounts to maintain their tax deferred or tax exempt status while transferring directly into the surviving spouses name, so not to be taxed on the deceased spouses final tax return or added to a total estate value.

For additional information, please have a look at the link below:

https://www.ig.ca/en/articles/2022/01/rrsp-vs-tfsa

If you are unsure which type of registered accounts will be most beneficial for you at this point in your life, or if you have any follow-up questions, please feel free to contact our office at 250 704-4040.

We hope you have found this information useful, and we encourage you to share it with anyone that you feel may find it beneficial.

Thank you for reading,

Branwyn Kew, QAFP

 

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Branwyn Kew is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.