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Friday, September 24, 2021

Pattie Lovett-Reid: RRSP or TFSA, what’s right for you?

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The clock is ticking – RRSP or TFSA – you decided, but it’s a good idea to pick one of them.

It is tough to do – divorcing your short-term fears from long-term potential gain.

We are in the thick of retirement planning season and for many the pandemic has left them paralyzed with uncertainty. So much so that in the third quarter, Canadians were saving 14.9 per cent of their disposable income compared to just 3 per cent the same period last year. The pandemic has changed not only our spending patterns but our savings as well. 

A new report by Edward Jones Canada highlights the shift in Canadians approach to retirement planning amidst a pandemic. The research found 52 per cent of Canadians are not planning to contribute to their RRSP this year, 44 per cent say they can’t afford to due to the pandemic, while 56 per cent are prioritizing other strategies like paying off their mortgage or investing in their TFSAs.

While I applaud paying off your mortgage, I would argue it is hard to eat a brick in retirement. I believe you still need retirement savings. It is about being balanced. 

If you align with the thesis you need to save money for retirement the next question is where do you save it?


To break it down here are the basics to consider:

The main difference between an RRSP and a TFSA comes down to the timing of taxes. An RRSP lets you defer taxes today and is especially effective if your marginal tax rate will be lower in retirement. With a TFSA, you have already paid tax on the money contributed, so this is the plan for you if you believe your marginal tax rate will be higher when you take the money out.

Here are some other notable differences between the two plans, to help you assess which will serve you better:

1. RRSP contributions are tax-deductible. TFSA contributions are not. With an RRSP, you can deduct your contribution from your income on your tax return. You cannot do this with a TFSA.

2. RRSPs were designed for retirement savings. TFSAs can be used effectively for any savings goal, including retirement and may give you accessibility and peace of mind due to the uncertainties surrounding the pandemic.

3. You pay tax on money withdrawn from your RRSP because the contributions were made with pre-tax dollars. TFSA withdrawals are tax-free because contributions were made with after-tax dollars.

4. There are restrictions on how long you can contribute to your RRSP. The last day you can make a contribution is Dec. 31 of the year you turn 71. After that, the plan must be converted to an annuity, a registered retirement income fund, or cash. There are no age restrictions attached to a TFSA.

5. You need earned income for a RRSP. However, earned income is not a requirement for a TFSA.

6. The RRSP deadline for the 2020 taxation year is March 1st, 2021 and the maximum contribution is $27,230

7. The annual TFSA dollar contribution limit is still $6,000 (this is the same limit as 2020). This means you’ll have to pay penalties if you add more than $6,000 to your TFSA in 2021.

Both RRSPs and TFSAs have merits. You decide which is right for you given your age, income, tax rate and investment strategy.

The bottom line – one day you will retire. It may be your choice or it may not be depending on your health. It could also be your employers choice. However, saving for retirement is within your control.

You have worked hard for your money and now it is time for your money to work hard for you. Sitting with excess savings in cash isn’t the best return on your investment.

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