As tax season quickly approaches, many of us are re-evaluating our finances and looking for the best place to put our money. RRSPs and TFSAs are two popular investing options that can help grow your savings. But what's the difference, and how do you choose the right one for you?
Let’s look at some key information & differences between the two.
Tax-Free Saving Account
When to use it: A TFSA is designed to help you save for both long-term and short-term goals – this includes big ticket items like a new home, vehicle, travel, a wedding or your retirement. A key benefit of a TFSA is that your savings grow tax-free.
Withdrawals: All withdrawals are tax-free and re-added to your contribution room at the start of the following year.
Contributions: Unlike an RRSP, TFSA contributions are not tax-deductible. The amount of money you’re allowed to contribute is based on an annual limit set by the Federal Government; in 2020 it’s $6,000. If you withdraw money one year and want to put it back in the same year, you'll need to make sure you have contribution room left for that year, otherwise you'll have to wait for the following year. If you contribute more than your limit, you’ll pay a penalty of 1 per cent per month on the excess amount. You can confirm your total contribution limit with the CRA.
Registered Retirement Savings Plan
When to use it: An RRSP is designed to help you save for retirement. Contributions are deposited pre-tax, which means you only pay tax when you withdraw your funds. And RRSP contributions are typically tax-deductible.
Contributions: The amount of money you’re allowed to contribute is based on your earned income. The 2020 limit is up to 18 per cent of your annual earned income to a maximum of $27,230 (the 2019 maximum is $26,500), subject to any pension adjustments plus any unused contribution room from past years. And you won’t pay any taxes on this money until you withdraw it.
Withdrawals: Since RRSPs are designed for long-term saving, withdrawals are subject to tax. However, under the Home Buyers' Plan, first-time homebuyers can withdraw up to $35,000 (or $70,000 for a couple) to finance a down payment, subject to eligibility and conditions. The withdrawal is tax-free but must be paid back into your RRSP within 15 years.
How do I decide?
There is no one-size-fits-all approach. If you're unsure, we are happy to discuss your options in further detail to help you assess which is best for your own unique situation.
Article Source: www.newscanada.com