Depending where you are in your life, retiring may seem like an event that’s way off in the distant future, not something you need to worry about “just yet.” However, the sooner you start planning for your retirement years, the more secure your financial situation could be when you get there.

Regardless of your income, there are options for you to start saving at any age. While it’s never too early, it’s also never too late to capitalize on both the effects of compounding, as well as the tax savings you can enjoy by investing in a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP). Both vehicles have their advantages, but which one is going to be the most beneficial to your current situation and future goals?

TFSAs – A newer savings option

TFSAs are a relatively new vehicle for saving. The Canadian government introduced TFSAs in 2009 to help Canadians set money aside without needing to pay taxes on the income earned. Anyone over the age of 18 who has a valid social insurance number (SIN) can open a TFSA. You can use a TFSA to save for anything you need or want: a home, a vacation, education, or yes, saving for retirement, without needing to pay any additional taxes on gains or interest earned inside the account, or when the funds are withdrawn.

TFSA contributions are made with after-tax income – there is no tax deduction for amounts contributed to the plan – but no tax is paid on any income or gains earned within the account. For example, let’s say you’ve contributed $10,000 to your TFSA and on that $10,000, you earned $200 in interest. The $200 is tax free and can be used for anything at any time.

TFSAs have an annual contribution limit. For 2020, that amount is $6,000. Unused contribution room from previous years is also available to you, so if you haven’t been taking advantage of having a TFSA until now, you will likely have considerable contribution room available. If, for example, you have been eligible to contribute to a TFSA for the last five years, but did not, be sure to check your TFSA carry-forward amounts from past years to see how much room you have for the current year. If you turned 18 in 2009 or earlier, you are entitled to the maximum contribution amount for 2020 (which includes unused room from past years) of $69,500.

RRSPs – Tailor-made for retirement savings

The RRSP was introduced to Canada in 1957 as a way for Canadians to save for retirement using a personal savings plan, allowing you to save for the future and realize a tax benefit now. That’s because the income and gains earned inside RRSPs are tax exempt until you withdraw funds, at which time you are taxed on that withdrawal as if it were regular income. The money you invest in your RRSP can stay there until the year you turn 71, and then must be transferred to a registered retirement income fund (RRIF). The last day you can contribute to your RRSPs is December 31 of the year you turn 71.

RRSPs are available to any Canadian with earned income who files tax returns and has a valid social insurance number. Even if you have an employer-sponsored registered pension plan (RPP), subject to available contribution room, you may still be able to create an RRSP to further benefit from tax-deferred growth. RRSP contributions are eligible for a tax deduction, which means you realize a tax savings annually when you file your tax return. This is one notable difference from a TFSA, where contributions are not tax deductible, but all subsequent income and gains are earned tax free.

Generally, there are two specific situations in which you can withdraw funds from your RRSP without paying tax: through the home buyers’ plan (HBP) and the lifelong learning plan (LLP). In both cases, the amount you withdraw must be paid back into your RRSP, but does not impact your annual RRSP limit. The HBP allows you to use up to $35,000 in a calendar year to purchase your first home, and the LLP allows you to use up to $10,000 of RRSP funds to finance full-time training or education for yourself, your spouse, or your common-law partner. You cannot, however, use the LLP to finance a child’s education.

Both TFSAs and RRSPs can hold a range of investment products, including:

  • Cash, guaranteed income certificates (GICs) and other deposits.
  • Shares, warrants, options, exchange-traded funds (ETFs) and real estate investment trusts (REITs).
  • Mutual funds and segregated funds.
  • Canada Savings Bonds, provincial savings bonds and regular bonds.
  • Insured mortgages.

Comparing the TFSA to the RRSP

Ready to start saving, but only have enough to invest in one vehicle? That’s just fine; but which one is best for both your current financial situation and your future goals? We’ve compiled a chart with an overview of the differences between TFSAs and RRSPs to help you decide:

List administrative fees

TFSA RRSP
Contributions Non-deductible, and made with after-tax dollars Tax deductible
Contribution room Added back in the year following a withdrawal Lost after withdrawals are made (aside from HBP and LLP exemptions)
Withdrawals Tax free Added to income and taxed at your marginal tax rate for the year of withdrawal
Wind down No requirement to withdraw at any age Must be converted to a RRIF, an annuity, or paid out in a lump sum by age 71. RRIFs are subject to a minimum annual withdrawal schedule
Maximum contribution $6,000 for 2020 $27,230 for 2020
Contribution age 18 and older Contributions cease at 71

Set up your RRSP or TFSA online

Opening up an RRSP or TFSA doesn’t need to be complicated or take a lot of time, and there are financial institutions that offer the option to open either one or both online. Just follow the instructions on their website and start your future today.

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