Invest in a TFSA, an RRSP or both

Most Canadians don’t know the difference between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). Here’s how understanding their unique advantages could save you thousands of dollars over your lifetime.

TFSAs and RRSPs – the basics

TFSAs let your investments grow tax-free. It’s a flexible option because it’s not tied to your income and there are no tax penalties on withdrawals, as long as you don’t go over your annual contribution limit.
RRSPs let you postpone taxes until you retire. You get a tax break on your current income when you contribute, but have to pay tax when you eventually make a withdrawal. Ideally, this will be in retirement when you are in a lower tax bracket.

Who should use them?

TFSAs are primarily for shorter-term goals. Think vacations, tuition, home down payment, or emergency fund. A TFSA can also be great for retirement savings if you’re currently self-employed, in a low-income bracket, or you want to top-up your RRSP or pension.
RRSPs are mainly for longer-term retirement savings. They’re especially good if you are currently in a middle-to-high tax bracket and expect to retire in a lower tax bracket, as most of us will. There also are government programs that allow you to “borrow” from your RRSP to pay for a down payment on your first home or to fund continuing education - just be aware of the rules around eligibility and pay back.

Who can have each type of account?

For a TFSA, you must be at least 18-years-old and have a Social Insurance Number (SIN). That’s it!
For an RRSP, you must be at least 18-years-old, have income from a job or self-employment, and file regular tax returns.

What are the contribution limits?

The 2024 TFSA contribution limit is $7,000. You can also carry over contribution room from previous years, so if you were 18-years-old in 2009 when the TFSA was first introduced and have never contributed to a TFSA, you could contribute up to $95,000 in 2024. If you’ve made any withdrawals from your TFSA, check with your SISIP Financial Advisor before contributing again to make sure you don’t get penalized for going over your limit. The formula is: Annual contribution limit + money withdrawn the previous year + unused contribution room to date.
The 2024 RRSP contribution limit is 18% of your earned income to a maximum of $31,560. You can also carry over contribution room from previous years, which is listed on your annual CRA tax assessment. When you file your tax return, you do not have to pay income tax on money you’ve contributed to your RRSP. Many people get a tax return as a result. If you’re also paying into a pension plan, your RRSP contribution allowance is reduced by the amount you’ve added to your pension.

What about spousal RRSPs?

If there’s a wide income gap between you and your spouse, talk to a SISIP Financial Advisor about the potential tax benefits of a spousal RRSP. It might be possible for the higher-earner to claim a nice tax break today and then reduce your family’s overall tax bill in retirement by spreading out the future income between both spouses.

Final thoughts

TFSAs give you flexibility. You can earn money without paying tax. Consider setting up automatic monthly savings for the things you want – flying lessons, a down payment, a vacation, or tuition. You might also use a TFSA for retirement savings if you’re just starting out in your career and anticipate your employment income to grow in the future.
RRSPs give you a tax break now. You can expect good news every year when you file your taxes. Consider putting your tax return money directly back into your RRSP to give your fund an extra boost. You can also use your RRSP strategically when you need income before you retire, such as during parental leave.

When you weigh the features and benefits of RRSPs and TFSAs, you can see why many people find that a combination of both is the best way to build a financially secure lifestyle. Ask a SISIP Financial Advisor what these two types of investments can do for you.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by Financière SISIP Financial for the benefit of Financière SISIP Financial a trade name registered with FundEX Investments Inc., and does not necessarily reflect the opinion of FundEX. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.

Mutual Funds Provided through FundEX Investments Inc.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Brynna Leslie, January 5, 2021

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by SISIP Financial, for the benefit of SISIP Financial a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.