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Column: RRSP vs TFSA: What's the difference?

It’s that time of year again, time to top up our RRSPs. While most of us scramble to find extra dollars by the March 2 deadline, some of us are wondering whether the newly introduced Tax Free Savings Account (TFSA) would be a better alternative.
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Speak with a trusted financial adviser to determine how to best align your extra cash with your savings goals. And remember, RRSPs will fund your retirement while the TFSA will help save for everything else on your wish list. File photo.
It’s that time of year again, time to top up our RRSPs.

While most of us scramble to find extra dollars by the March 2 deadline, some of us are wondering whether the newly introduced Tax Free Savings Account (TFSA) would be a better alternative.

There is much talk about the benefits of the TFSA, since it was introduced in 2009, but it seems to have left many of us confused. Just when we got into a good rhythm of regular RRSP contributions, the government launches a new savings plan strategy and forces us to do our homework on what option best suits our needs.

Speaking of needs, let me go over some of the most common financial needs of folks today and which savings plan provides the best solution.

Registered Retirement Savings Plans (RRSPs) are self-explanatory — the goal of this savings vehicle is mentioned in the title: retirement. RRSPs are generally seen as the primary savings approach when it comes to funding our retirement years.

If you have a company-sponsored pension plan, great! However, if you have extra cash each month, and you have big plans for retirement, it may be wise to put additional money away into RRSPs.

After all, by funding an RRSP within the limits provided by your annual notice of assessment issued every year, you are taking advantage of tax deductions. Every dollar contributed to an RRSP lowers your annual taxable income. Earnings within your RRSP savings are not taxable, but when you withdraw money from the RRSP, the amount is fully taxable.

In addition to individual tax deductions of an RRSP, a Spousal RRSP may be beneficial when one spouse has a significantly higher income than the other.

It is essential to speak with a trusted financial adviser when determining whether RRSPs are best suited for your financial goals.

Now that you have a general understanding of the purpose of RRSPs, think of the Tax Free Savings Account (TFSA) as the savings solution for every other financial goal you may have.

The TFSA is a savings vehicle for short- and long-term goals. In short, the TFSA provides a flexible solution for saving money, while not having to worry about being taxed on earnings or withdrawals.

Whether you would like to save for a rainy day or for a major purchase like a vehicle or home renovation, the TFSA is the way to go.

However, keep in mind there are a couple differences between the RRSP and TFSA options.

For instance, while RRSP contributions provide tax deductions, TFSA contributions do not.
Furthermore, every individual’s RRSP room varies, but the TFSA only allows annual contributions of $5,500.

Nevertheless, unused room is carried forward each year. Therefore, if you have not begun contributing to a TFSA, your total room to date amounts to $36,500, including the current year’s room of $5,500.

In summary, speak with a trusted financial adviser to determine how to best align your extra cash with your savings goals. And remember, RRSPs will fund your retirement while the TFSA will help save for everything else on your wish list.

Heather Tarnopolsky is a Sun Life Financial adviser in Greater Sudbury.
 



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