Invest in your RRSP or TFSA?
With the RRSP deadline of March 1st, 2018 looming, now is the time to consider topping up your Registered Retirement Savings Plan (RRSP). What about a Tax-Free Savings Account (TFSA)? Could that be a better investment option for your money? There are many factors to consider when choosing which investment account to choose. Each has multiple benefits, you just need to determine which one is the best move for you and your financial goals.
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RRSP investments give you a tax break. This is a good reason to invest in your RRSP if you are in a higher tax bracket. By investing in your RRSP, you lower your taxable income for the year, which can result in a refund from the government. Before you go topping up your RRSP, you should think about what your income level might be like at the time of withdrawal. If, at the time of withdrawal, you are in a higher tax bracket, you could pay more in taxes in the future.
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TFSA withdrawals are tax-free. A great benefit of the TFSA is the ability to not only gain interest tax-free but also all of your withdrawals are tax-free. This can be a benefit if you are currently in the lowest tax bracket and would not benefit from an RRSP deposit today. If your income rises and you could benefit from the tax break, the money can easily be transferred over to your RRSP.
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TFSA money is easier to access. When doing a withdrawal from your RRSP, there are always taxes withheld, depending on how much you take out. This means you will need to withdraw more money to meet your needs. Furthermore, this money is considered income and is taxed the following year. With a TFSA, there are no taxes withheld and any cash withdrawn from the account is not considered income, so there is nothing to report come tax season.
Striking that proper balance between your TFSA and RRSP does take some time, as your financial goals and future will help dictate which direction is best for you. Reinvesting your tax return into your RRSP will help boost your retirement savings even faster; your TFSA will give you access to money if you find you need it to help pay for some unexpected expenses. Talking to your financial advisor can help determine which approach is best for you. Call us today to set up an appointment and we can review your current plan.