Is a TSFA better than an RRSP?- Chartered Accountant Toronto

Allan Madan, CA
 Feb 13, 2010
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Have you ever wondered whether it’s better to invest in a TFSA or an RRSP? 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.

TFSA

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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

RRSP

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

TFSA RRSP
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 $5,500 18% of prior year’s earned income up to $25,370
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 and savings strategy says Allan (Chartered Accountant Toronto).

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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