Are you getting ready to make the big decision on whether to open a TFSA or an RRSP? Both are excellent investment choices that can grow your money, but one may be better for your lifestyle. Here we outline the main differences between an RRSP and TFSA that can help you make the right decision for your long and short-term financial goals.
Contribution Room Allowance
With a TFSA, the new contribution room that is created each year is subject to change, and for 2017 the amount allowable was $5,500. However, with an RRSP, you can submit 18% of previous year’s earned income, less any pension adjustment, and up to the maximum annual RRSP limit.
Carrying Forward Contribution Room
You can carry forward your unused contribution room within a TFSA indefinitely. But if you have an RRSP, it can only be carried forward until the age of 71. At that time you can no longer make contributions into your RRSP and will need to convert it to another financial plan.
Tax-Deductible vs. Tax-Free
Only in an RRSP are the contributions tax deductible. Your savings grow tax-deferred until you withdraw your amount. In a TFSA, your savings grow tax-free and are never taxed.
Withdrawing Your Money
You can withdrawal your TFSA money at any time, tax-free. Any amount you withdraw is added to your contribution room starting the next year. If you withdrawal from your RRSP however, it is considered earned income, and you may first face a penalty fee for early withdrawal, and then you will need to claim any taxable income on your T4 slip that year. If you want to make another contribution right away, you can, just as long as it does not surpass your annual contribution room allowance.
If you over-contribute one year, you will be subject to a 1% tax penalty per month in your TFSA. The same goes for your RRSP. However, the penalty tax only applies if you exceed the $2000 lifetime over-contribution amount.
Your TFSA does not have to be converted at a certain age; you can enjoy the benefits indefinitely. On the other hand, if you have an RRSP, you will need to convert your plan to a Registered Retirement Income Fund (RRIF) or an Annuity by the end of your 71st year. You could also opt to close the plan entirely if you prefer to do so.
As you can see, there are plenty of advantages to both a TFSA and an RRSP. If you’re not quite sure what plan is best for you, talk to one of our Chartered Professional Accountants at Priti Lad Professional Corporation today. We can help you decide what plan is best for your short-term and long-term goals and lifestyle.