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CFS Wealth blogLooking to put some money aside and have no idea what saving account is best for you? You’ve come to the right place! The question of whether to invest your money into a Tax-Free Savings Account or Registered Retirement Savings Plan often comes up. Understanding the differences between a TFSA and an RRSP will help you decide which to use and when. 

What is a TFSA? 

In an effort to encourage Canadians to save more money, the Canadian Government launched the Tax-Free Savings Account program in 2009. It is a program designed for individuals 18 and older to save tax-free money throughout their lifetime. Any contributions to a TFSA cannot be deducted for income tax purposes and any income invested or earned in the account is usually tax-free. Each year the government sets a limit as to how much an individual can contribute to their TFSA account. This is called your TFSA contribution room. Any amount contributed to the TFSA over the yearly limit will be subject to a tax penalty. Each year you accumulate the TFSA contribution room and the contribution room starts to add up the year that you turn 18. That would mean that if you were 18 or older when the program launched in 2009, you will have a lifetime contribution limit of $69 500 in 2020. Typically, your TFSA contribution room can be found in your CRA account. A TFSA account can hold a plethora of investments in it. Cash, mutual funds, bonds, GIC’s are just some of the different investment vehicles at your disposal. Any income earned or dividends in your TFSA account does not count towards your yearly contribution so the longer you hold your position in a TFSA, the more rewarding it will be. 

What is an RRSP? 

A Registered Retirement Savings Plan allows you to invest a portion of your yearly gross income without paying income tax on that money that year. The yearly investment limit is determined by the lower number between 18% of your yearly gross income or $26 500. This savings account basically allows you to defer your taxes as you save for retirement. It is important to note that you will pay tax on this contribution when it is withdrawn. The thinking behind this account is that most people will not have the same income when they are retired as when they were working, and therefore they will have to pay less tax on their RRSP withdrawal. Much like a TFSA, the same investment vehicles are allowed in an RRSP account. Some companies might have benefits in place where they match your RRSP contribution on the year or top-up any money put towards your RRSP account. If you are planning for the long-term, it would be an easy choice to contribute to your RRSP if someone adds even more to it on a yearly basis.  

Investment objective 

Ask yourself what your overall goal is when using this money. Think about both the long-term and short-term benefits of each account. If you know that you need to access the money in that account at any point, TFSA is the way to go. On the other hand, if you have already maxed out your TFSA contribution or your long-term goals are to retire with a big savings account, focusing on an RRSP may be the better choice. Both plans give you the power to have your saved money make more along the way. For financial advice, feel free to call one of our professionals at  1-888-451-6133 to discuss more. Let’s make sense of it all!

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