ТFSA or RRSP?

Roman Mlynko, CIM, CFP
Consultant, UCU Wealth Strategies Group

You probably already use RRSPs as a way to save for the future. But ever since the federal government introduced Tax Free Savings Accounts (TFSA) in 2009, you have another option. This type of investment account can serve as a supplement to your RRSP, but how do you decide which plan is best for you?

First the great news: Your lifetime contribution limit to a TFSA rose to $36,500 as of January 1, 2015! What follows in this article is a list of information that might help you decide which is best for you, RRSP, TFSA (or maybe a mix of both).

If you wish to access your money frequently and conveniently – use the TFSA. You can remove your savings from a TFSA tax-free at any time, and then you can put it right back at a future time. As for RRSP, it is more useful as a long-term investment tool. 

If your annual income is low, then the TFSA can be a better alternative because the tax-free withdrawal feature and flexibility with which you can sue the TFSA can outweigh the benefits of the small tax deduction you get for making an RRSP contribution.

If you are just entering the work force then you should probably start by investing in a TFSA account. After a while, when your income is higher and you’ve had a chance to accumulate enough contribution room to really take advantage of the tax deductions RRSPs provide, then you might want to consider starting up an RRSP account.

If you need a loan, you can use the TFSA as collateral (unlike an RRSP). However, interest paid on a TFSA or RRSP loan is not tax-deductible.

A TFSA may also be better than the RRSP Home Buyers Plan or Life Long Learning Plan savings for housing or education. That is because any money withdrawn from a TFSA does not need to be returned, or if you decide to use the money for other purposes, you do not have to pay taxes.

If you already have investments sitting in GICs, money market mutual funds, term deposits or bonds, which pay interest that is taxable in full, why not place those investments into a TFSA, where those profits will be protected from tax. If you have a high-risk / high-yield investments, a TFSA may also be better than an RRSP account. For example, if your initial $10,000 investment in a TFSA increases to $100,000, the entire amount can be withdrawn tax-free! The downside is that you cannot use the so-called "capital loss" tax deduction if any of your investments within a TFSA lose their value.

Investments in a regular account can be transferred to a TFSA, but you should first consult with an expert on the possible tax implications.

If your pension fund limits your contributions to an RRSP, use a TFSA to supplement your retirement savings.

If you are going to retire in 10-20 years, use your TFSA to accumulate retirement savings more aggressively than is typically possible with other tax-sheltered investment vehicles.

If you have maxed out your RRSP contribution room, use a TFSA to shelter additional investments from taxes.

If you want to reduce taxable income in retirement, use a TFSA in addition to an RRSP account. After you transfer your RRSP into a RRIF (when you turn 71), money that is withdrawn from the RRIF is taxed according to your income level. So, if you do not need all of the money that you have withdrawn from a RRIF/LIF, put the remainder into a TFSA where it can continue earning interest without you having to pay more tax on the earnings. If you receive Old Age Security, Canada Child Tax Benefit, Employment Insurance or the Guaranteed Income Supplement, use a TFSA to avoid potential reductions of these payments because money taken from a TFSA is not considered income.

These tips are of a general nature. Your situation is unique and needs to be analysed for your personal  requirements .If you have any questions about TFSA, RRSPs or other investment plans, please contact me or one of our other investment advisors for professional advice.

May you be successful in your investing!

Roman Mlynko, CIM, CFP

Wealth Strategies Consultant

Ukrainian Credit Union Limited

416-763-5575 x201

rmlynko@ukrainiancu.com

ukrainiancu.com