Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) both help ensure future financial comfort. They bear many similarities, but also key differences that make one more ideal than the other for individuals.
How Do TFSAs Work?
TFSAs are government-registered accounts where you contribute a certain dollar amount each year, and your funds accrue interest over time.
Getting a TFSA requires being at least 18 years of age and having a Social Insurance Number (SIN).
This account isn’t tax-deductible. The current annual contribution limit is $6,000. The amount you’re permitted to contribute is known as the contribution room. This fluctuates in accordance with inflation. It’s indexed to inflation, then rounded to the closest $500.
How Do Withdrawals Work With TFSAs?
One appealing aspect of TFSAs is the fact that the withdrawals aren’t taxed. The funds in your TFSA are accessible at any time. When you make a withdrawal, that amount is added back to your contribution room the following year.
Who Are TFSAs Ideal For?
TFSAs are best for individuals who are saving for more immediate expenses, such as a car or new home. It’s ideal for someone with a certain level of income instability, and this person will be able to benefit from a TFSA’s easy access.
How Do RRSPs Work?
Like TFSAs, RRSPs are affiliated with the Canadian government. The principle of account growth remains the same – contribute to your account, and let your funds grow with interest over time.
Instead of requiring account holders to be 18 years old with an SIN, you can get an RRSP as long as you earn income and pay taxes.
What you put toward your account is tax-deductible and grows tax-free. Your contribution limit is 18% of the income you earned the previous year, in addition to contribution amounts you didn’t use in the years prior.
You can only contribute to your account up until December 30 of the year you turn 71. At that point, you can convert your RRSP to a Registered Retirement Income Fund (RRIF), withdraw all funds in one lump-sum, or use it for an annuity.
How Do Withdrawals Work With RRSPs?
Withdrawals are taxed at the annual marginal tax rate. It’s ideal to withdraw upon retirement instead of on an as-needed basis. When you withdraw, you lose contribution room, and this hinders your account growth.
Who Are RRSPs Ideal For?
RRSPs are better for those with a strict focus on retirement. Its best feature is its tax-free growth capacity, which is a better choice for those with higher earnings and an overall stable income.
Build Your Savings Today
Fidusure Financial is here to give you the guidance you need to achieve financial success. We will provide our expertise to give you the exact plan that works best for you, so that you can enjoy a future of financial comfort and freedom. Get started today by calling us at (647) 567-4702.