RRSP or TFSA: Which one is best for you?

By Angela Iermieri, Financial Planner

It can't be stressed enough: When it comes to personal finances, every situation is different. There's no easy, go-to formula. The best you can do is make the decisions that are right for you and that will help you achieve your goals.

In a 2018 Desjardins Insurance Financial Health and Wellness Survey of nearly 3,000 Canadians:

Insufficient savings and the lack of an emergency fund as 2 main sources of stress.

55% of respondents cited these sources of stress.

With the RRSP contribution deadline looming, it seems like a good time for a quick refresher. As the name suggests, the purpose of the registered retirement savings plan is to help you save for your retirement. Unless funds are withdrawn early to buy your first home or finance full-time education, the money you invest in an RRSP will grow until retirement.

What about TFSAs?

A tax-free savings account allows you to earn tax-free investment income by saving up to a maximum of $6,000 for 2019. Take a look at the contribution limits below:

What about TFSAs?
YearsTFSA Annual LimitCumulative Total

More and more people are investing in TFSAs, but many still wonder who they really benefit.

Based on your individual situation and needs, a TFSA may be the right choice for you, especially if:

1. You're saving for a medium- or long-term project

A TFSA is much more than a savings account. It's a useful tool for people who want to save for a project they plan on completing within three to five years. A TFSA offers the flexibility of allowing you to withdraw any investment income you build up tax-free. And those few extra dollars go straight to funding your project. But while there are no limitations on withdrawals, we strongly recommend that you do not make it a habit. For 2020, the government has set a maximum contribution of $6,000 for TFSAs with a cumulative ceiling of $69,500 if you haven't previously contributed. If, through deposits and withdrawals, you exceed this amount, you will be penalized. That's why a TFSA should not be used as a regular chequing account.

Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year. Withdrawals made from your TFSA this year will be added back to your TFSA contribution room at the beginning of the following year.

2. You've maximized your RRSP investments

In this particular case, a TFSA is a good option for anyone who contributed the maximum to their RRSP. These people usually earn a higher income and have little or no RRSP contribution room left. If this is your situation and you're looking for a tax-free investment vehicle, a TFSA is the perfect solution.

3. You're retired

Retirees stand to benefit the most from TFSAs. They can no longer invest in an RRSP if they are more than 71 years old or if there is no more contribution room available, and if they still want to accumulate savings, any income they earn is added to their retirement income. This means they end up losing a portion of government benefits they would otherwise be entitled to, such as the Guaranteed Income Supplement for lower-income retirees or the Old Age Security pension for those with a higher income. This makes the TFSA a great option if you're retired!

4. You earn a lower income

I often meet young people who are just starting their career and want to contribute to an RRSP. While it's never too early to start contributing, an 18-year-old who just started working may be better off opting for a TFSA.

Because they often earn less than $40,000 a year, they are in a lower tax bracket, and wouldn't necessarily benefit from the tax refunds RRSPs offer. However, money deposited in a TFSA will generate tax-free investment income. As their salaries increase, there's nothing stopping them from transferring the money saved to an RRSP, as they won't have reduced their RRSP contribution room.

So remember, each situation is different. By talking to your advisor, you'll have all the information you'll need to make the right decision for your financial situation.

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