An RRSP (Registered Retirement Savings Plan) is a savings plan that is registered with the Canadian government, and it is designed to help individuals save for retirement. Contributions to an RRSP are tax-deductible, which means that they can be used to lower your taxable income in the year they are made. And while the money is invested inside an RRSP, it grows tax-free. However, when you make withdrawals from an RRSP, the withdrawals are fully taxable as income.
A TFSA (Tax-Free Savings Account) is another savings plan that is also registered with the Canadian government, but it is designed to help individuals save for any purpose, not only for retirement. Contributions to a TFSA are not tax-deductible, but any investment income earned inside the plan and withdrawals from it are completely tax-free.
Both plans have contribution limits set by the government and have different rules for withdrawals, penalties and contribution room carry forward.
There are many strategies that can help you maximize the benefits of these accounts as part of your overall investment allocation.
So which one is better?
It depends on your financial goals and situation. An RRSP might be better if you are in a higher tax bracket and want to lower your taxable income. A TFSA could be a better option if you’re looking for a flexible savings plan that won’t affect your taxable income and you can withdraw your savings tax-free at any time.
Contact our team to determine which option may be right for you based on your individual circumstances.