(NC) There are two four-letter acronyms in the personal finance world that tend to get mixed up, the Registered Retirement Savings Plan and the Tax-Free Savings Account. In fact, a 2017 survey by H&R Block found that more than one in three Canadians don't understand the difference between them.
Both are great tools to help you save for retirement, but they differ in many ways. Here is some information that can help you decide where to put your money.
Saving for the future. Both the TFSA and RRSP are vehicles to help you save for the future, whether that's for education, purchasing your first home, or for retirement. Contributing a percentage of your income to either can help you to achieve your financial goals.
Contribution limit. Unfortunately, the sky is not the limit when you're contributing money to either type of account. For TFSAs, the limit changes from year to year; in 2018 it's $5,500. However, your total contribution is cumulative, so you can roll over this contribution room year to year. For RRSPs, your contribution limit is based on 18 per cent of your earned income, to a maximum of $26,010 for 2017, plus any unused contribution room from previous years. You can determine your limits by looking at last year's Notice of Assessment from the Canadian Revenue Agency.
Withdrawals. You can withdraw funds from your TFSA at any time you like, without tax consequences. However, if you withdraw money from your RRSP, it will be included in your taxable income, unless you are participating in the Home Buyer's Plan or Lifelong Learning Plan.
Tax deductions. Contributions to TFSAs have no impact on your tax situation, but RRSPs are tax deductible, reducing your income tax payable. If you contributed to your RRSP before the March 1st deadline of this year, you can claim a deduction on your upcoming tax return.
If you are deciding between the two investment strategies, it's important to factor in a number of considerations like your income, savings goals, short-term and longer-term plans, and your current life circumstances. If you have questions about which savings vehicle makes sense for you, speak with one of your local tax experts.
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