Money & Career

Tax-free savings account or RRSP?

Which one makes more sense for you depends on where you are in life and how much you earn - at least that’s what my husband and I are learning as we talk about how much to put into our RRSPs this year versus our TFSAs.

Ever since it was introduced by the Feds in 2008, the Tax-Free Savings Account (TFSA) has been shaking up the retirement savings world. Okay, I’ll admit we’re not talking about the kind of controversy and debate that, say, Brad and Angelina’s hookup caused, but it’s all relative, right?

The question is, should you make contributions to your TFSA a priority over savings in your registered retirement savings plan (RRSP)?

Which one makes more sense for you depends on where you are in life and how much you earn – at least that’s what my husband and I are learning as we talk about how much to put into our RRSPs this year versus our TFSAs.

Our TFSA lets us save up to $5000 a year and we can withdraw all of our investment income tax free whenever we want to. An RRSP lets us put away a lot more annually (up to 18 percent of our earned income from the previous year to a maximum of $22,000 for 2010) and we also get a tidy tax refund on the contribution. The catch: the tax bill on our RRSP savings will come when we need it most – when we start drawing on the money in retirement.

The fact that you don’t pay tax at all on TFSA withdrawals makes them really compelling – especially if you’re relying on OAS to help make ends meet post-65. OAS payments are clawed back once your income reaches about $67,000 – withdrawals made from an RRSP in retirement (through your RRIF) are considered taxable income and could bump you over that $67,000 limit.

In our case, though, I think RRSPs are still the way to go. They allow us to save a lot more annually – that’s key since neither of us has a pension plan at work and we’re in our peak earning years. TFSAs have a fixed annual limit of $5000 – that won’t be enough room for us to save what we need to at the moment (unless they seriously up the contribution limit which would make these savings vehicles much more enticing!).

If you have a good pension plan or you’re young and earning less, then a TFSA might be the way to go.

This year we’re finding a way to balance contributions both our RRSPs and our TFSAs. We’re planning to make RRSP contributions and any tax savings we get from that will go straight to our mortgage fund. We’ll use our TFSA as short-term savings for the mortgage debt payment money – that will help us build up our TFSA room for later.

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