You are probably wondering which is better, TFSA or RRSP, and which option is more convenient for you. It is important that you know the differences between the two and how to invest in each of them, as they are solutions that will help you save money and make your tax return more efficient.
Before you start, we recommend reading our posts on the Tax Free Saving Account (TFSA) and the Registered Retirement Savings Plan (RRSP), so that you can better understand the concepts of each type of account and its characteristics.
In reality, there is no better option than another, but rather they are suitable for specific situations. You must analyze your current financial situation and your goals to decide which is best for you. Remember that with TFSA you use the money to make contributions after paying taxes, while with RRSP you receive a refund of the money you contribute, but you must pay taxes later. Take these differences into account, along with your income and investment horizon, to make the right decision.
Among the most influential factors are your annual income and your tax bracket. These would be the appropriate options for each situation: RRSP for incomes above $50,000 and TFSA for incomes below $50,000. Income defines the tax bracket and has a direct impact on the most convenient types of investments.
As for investment or savings goals, RRSP is best suited for long-term goals, while TFSA is ideal for short or medium-term goals. Before investing, identify what you really need. It is not the same to save for retirement as it is to have an emergency fund.
Despite the above, if your goal is to buy a house or save for education, RRSP is the best alternative thanks to the Home Buyers’ Plan and the Lifelong Learning Plan. These plans allow you to withdraw from your RRSP account towards these goals without penalties.
In short, in most cases, RRSP is the best option for retirement, although you should analyze the total amount of your income. Withdrawals from TFSA accounts are always tax-free, regardless of whether you are retired or working. On the other hand, RRSP withdrawals are subject to tax, except in the cases of the programs mentioned above. If you are at retirement age, you will probably be in the lowest tax bracket, which makes RRSP withdrawals have a lower rate than the one you had when you obtained the contribution money.
