TFSA's vs. RRSP's

Ever since the tax-free savings account (TFSA) and the registered retirement savings plan (RRSP) were introduced to the Canadian financial landscape, individuals have been plagued with the issue of where to park their funds. Both of these vehicles offer tax savings, but which is better? The answer is there is no answer. There are a few questions you can ask yourself to determine which one is appropriate for you.

What am I saving for?

Retirement: Either vehicle can be used for retirement savings, but the RRSP offers the benefit of tax-sheltered earnings. This means that contributing money into your RRSP allows you to enjoy tax savings at your respective taxable rate. Once the funds are withdrawn upon retirement, they are taxed, but you will likely be in a lower tax bracket upon retirement.

First home: The RRSP offers the Homebuyers’ Plan (HBP), which allows you to withdraw up to $25,000 towards your first home. These funds must be paid back into your RRSP within 15 years, but offer a great tax-sheltered alternative to saving money for your first home.

What is my time horizon?

Short-term savings: If you are saving for a short-term goal such as a holiday or a car, the TFSA might be your best bet. As indicated by its name, the TFSA simply works as a savings account with tax-free investment gains. Depositing and withdrawing from a TFSA is fairly painless and as such, would be an appropriate vehicle for saving for short-term goals.

Mid to long-term savings: RRSP contributions are a tool through which you may save for retirement while enjoying current tax benefits. TFSAs may also be used for long-term savings, but don’t offer a tax deduction on income.

With Canadians suffering in the savings department, TFSAs and RRSPs both offer attractive incentives to save money. Whether it is short-term or long-term goals make saving money a priority. A good rule to follow is saving 10% of your monthly income. In fact, thanks to compound interest, the earlier you start the less you have to save in the long run!