Have you ever wondered whether it’s better to invest in a TFSA or an RSP? As a Chartered Accountant in Toronto, I’m here to help you evaluate the pros and cons of each, so you can make a more informed decision.
The Tax Free Savings Account (TFSA) was introduced by the Canadian government on January 2, 2009.
The tax attributes of a TFSA are as follows:
- Any income or gains earned inside the TFSA are not taxable
- Withdrawals from a TFSA are not taxable to you
- If you withdraw an amount from a TFSA, you can contribute that amount again to the TFSA
- You can contribute up to $5,000 to a TFSA per year and any unused contribution room carries forward to the next year
- You do not receive a tax deduction for amounts contributed to a TFSA
Canadians are very familiar with Registered Retirement Savings Plans (RRSP), as they have existed for a number of years now.
The tax attributes of an RRSP are as follows:
- Any income or gains earned inside the RRSP are not taxable
- Withdrawals from an RRSP are taxable to you
- If you withdraw an amount from a TFSA, you cannot contribute that amount again to an RRSP
- You can contribute up 18% of your prior year’s earned income to a maximum of $21,000 to an RRSP and any unused contribution room carries forward to the next year
- You receive a tax deduction for amounts contributed to a TFSA
Comparison of TFSA & RRSP – Prepared by Chartered Accountant Toronto
|Income / gains realized inside the plan||Not taxable||Not taxable|
|Withdrawals from the plan||Not taxable||Taxable|
|Can withdrawals be contributed back to the plan?||Yes||No|
|Annual contribution limit||$5,000||18% of prior year’s earned income up to $21,000|
|Are contributions tax deductible?||No||Yes|
“The answer as to whether a TFSA is better than an RRSP depends on your savings goals”, says Allan Madan, a Chartered Accountant in Toronto. (http://madanca.com/about/about-us)
If you intend to save money for only a short period of time (e.g. for a vacation) then a TFSA is better because the withdrawals are not taxable.
On the other hand, if you intend to save for a long period of time (e.g. for retirement), then an RRSP is more advantages because the benefit of the tax deduction today far outweighs the cost of the tax that you have to pay on withdrawals made upon retirement. This is based on the time value of money concept.
In addition, it may be wise to contribute to both an RRSP and TFSA. If you regularly contribute up to your RRSP limit, you can top-up your savings by contributing to a TFSA also. Combined, they make a great retirement strategy.
About the Author – Accountant in Toronto
Allan Madan is a Chartered Accountant in Toronto and is the owner of Madan Chartered Accountant. Allan has been providing tax advice to individuals, corporations, investors and the self employed for many years. For additional tax tips, please visit http://madanca.com/services/10-best-tax-tips
Accounting Firm Mississauga – Free tax tips (over contribute to your RRSP by $2,000)
Accounting Firm Toronto – How to beat the taxman (discusses the savings power of RRSP’s for Canadians)