Money

How to be saving smarter - RRSPs versus TFSAs

By Thomas Johnson, Financial Security Advisor

Thomas Johnson is a financial security advisor. (File photo)

Thomas Johnson is a financial security advisor. (File photo)

Taxes - there is arguably no other word in Canadians’ vocabularies that generates more collective stress and resentment. Oftentimes it’s jaw-dropping how much income tax leaves every paycheque before it touches your wallet, and what money you have left is still not safe from the taxman.

When you spend your money you pay sales taxes, and when you save you pay income tax on the investment income. It may appear to be a lose-lose scenario, however, there are a few ways to reduce or even eliminate the potential tax bill when it comes to saving and investing money.

Most of us have heard of a RRSP (Registered Retirement Savings Plan) or TFSA (Tax Free Savings Account). We are constantly bombarded with the message that we must have them, yet rarely are we told exactly why or how they work.

RRSPs and TFSAs have a lot in common. Think of both as a label you attach to your money in order to get special tax treatment. You can hold a variety of investments in either one, including savings accounts, GICs, mutual funds, stocks or bonds, and a whole lot more. Both have government-mandated limits on how much you’re allowed to save each year. Lastly, any investment income such as interest, dividends, or capital gains earned inside an RRSP or TFSA isn’t taxable that year, which can lead to significant savings over a long period of time.

There are important differences between the two. When it comes to the RRSP, every dollar you save in a year earns you a tax deduction for the same amount. As an example, an individual earning $50,000, who saves $5,000 in an RRSP, will be taxed as if they made $45,000 instead. When the money comes out of an RRSP, barring any special government programs, you will include the amount withdrawn in your taxable income for the year.

A TFSA works opposite to an RRSP in these regards. You don’t get an immediate tax deduction for saving inside a TFSA but you don’t have to pay any taxes when you withdraw the money, even on the growth.

So which is better? It truly depends on you and your unique situation. Your income level today, income level in the future and your goals all factor into the decision. This is where your accountant or advisor can help determine the best course of action to keep your tax bill as low as possible now and over time.


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