Mar 27: BEST FROM THE BLOGOSPHERE
March 27, 2023
Which is best for retirement savers — an RRSP or a TFSA?
Writing in the Toronto Star, Ghada Alsharif takes a look at the question of choosing the right vehicle for you when it comes to retirement savings.
She says both a registered retirement savings plan (RRSP) and tax-free savings account (TFSA) can help you save on taxes while you save for retirement, but that they work differently.
“RRSPs offer a tax deduction when you contribute but you pay tax when money is withdrawn. On the other hand, TFSAs offer no upfront tax break but you don’t have to pay tax on withdrawals. Both accounts help you reach your savings goals faster than a regular savings account because both grow tax-sheltered,” Alsharif explains.
Her article quotes Jason Heath of Objective Financial Partners as saying that choosing between the two options may be decided by how much you make.
If, Heath states in the article, you have “high income it’s a good time to contribute to a RRSP if you expect to pull the money out at a lower tax rate in the future. That’s not often the case for a young person who’s just getting started at their first job or is working part time, doing schooling and getting established in their career.”
A TFSA is better for lower income earners, who are taxed less on their income. Funds within the TFSA grow tax-free and aren’t reported as taxable income when they come out, the article explains.
A chart in the article shows the correlation between income and which savings vehicle people choose. The TFSA is preferred by the vast majority of those earning $49,999 or less, the Star reports. It’s more of a 50-50 choice for those earning between $60,000 to $89,999, but RRSPs predominate among those earning $90,000 and above.
“The drawback to contributing to a RRSP is someday you’re going to pay a tax on those withdrawals. That’s why it’s important to make sure when you’re putting money in, you’re getting a large tax refund to make it worth paying tax on the withdrawals someday,” Heath states in the article.
Our late father-in-law had an interesting use for his TFSA. When he was required to make withdrawals from his registered retirement income fund (RRIF), he would pay the taxes on the withdrawal, and then reinvest the balance in the TFSA. The income from the TFSA would gradually increase and is of course tax free.
A problem with both the TFSA and the RRSP is that you can tap into the money before it’s time to withdraw it as retirement income. There are tax consequences for raiding your RRSP piggy bank, but none with the TFSA. A nice way to avoid dipping into your savings is by opening a Saskatchewan Pension Plan account. SPP is locked-in, meaning you can’t help yourself to your savings until you’ve reached retirement age. Your future you will appreciate that!
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.