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If there is one invariable “rule” of financial and retirement planning of which most Canadians are aware, it is the unquestioned wisdom of making regular contributions to a registered retirement savings plan (RRSP). And it is true that for several decades the RRSP was only tax-sheltered savings and investment vehicle available to most individual Canadians.
Eleven years ago, however, that reality changed with the introduction of Tax-Free Savings Accounts (TFSAs). Since then, taxpayers have had a choice of which savings and investment vehicle better meets their short term and long term financial objectives, and this is the time of year when most Canadians make that choice.
It should be said that there’s nothing wrong, and a lot right, with making the maximum allowable contribution to both one’s TFSA and one’s RRSP every year. However, doing both assumes the availability of a level of discretionary income that just isn’t the financial reality in which most Canadians live and plan. In addition, there are circumstances in which making a contribution to one type of plan or the other is clearly the better choice, and sometimes the only choice. Some of those circumstances are as follows.
At the other end of the age spectrum, younger Canadians whose savings goals are likely more short-term are usually better off saving through a TFSA.
The greatest tax benefit of contributing to an RRSP is realized when contributions are made when income (and therefore tax payable) is high, and the intention is to withdraw those funds when both income and the rate of tax payable on that income is lower. Where that’s not the case, saving through a TFSA can make more sense, as in the following situations.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.