TFSA vs RRSP Benefits
Hey there, young adults! Are you starting to think about saving for your future? That's great! It's never too early to start planning for your financial goals. Two popular savings options you might have heard of are TFSAs and RRSPs. But what's the difference between them? Let's take a closer look!
TFSA:
TFSA stands for Tax-Free Savings Account.
You contribute money to your TFSA after taxes have been taken out, so it doesn’t lower your taxable income.
You can only contribute a certain amount each year, and if you go over, you'll have to pay a penalty.
For 2023, the contribution limit is $6,500 (the number grows every few years).
Any unused contribution room not used in previous years rolls over (only starts after you turn 18).
The money you earn in your TFSA (such as interest or investment gains) is tax-free.
You can take money out of your TFSA any time you want, without paying any taxes or penalties.
TFSAs are best for people who think they're currently in a lower tax bracket than when they retire.
Normally it’s recommended to invest in your TFSA until you max out the contribution limit before investing in your RRSP assuming you start early and believe your income will grow over time.
RRSP:
RRSP stands for Registered Retirement Savings Plan.
You can contribute money to your RRSP before taxes are taken out, which means you'll lower your taxable income for the year you make the contribution.
When you withdraw money from your RRSP in retirement, it will be taxed as income.
You can only contribute a certain amount each year, and if you go over, you'll have to pay a penalty.
For 2023, the contribution limit is 18% of earned income in the previous year, up to a maximum of $31,560 (this maximum grows each year)
Any unused contribution room not used in previous years rolls over (only starts after you turn 18).
RRSPs are best for people who think they're currently in a higher tax bracket than when they retire, because the tax savings you get now will be worth more then the taxes you will pay in retirement.
Because space is limited most people try to use their RRSP room during their peak earning years when they believe they’re in the highest tax bracket.
So, which one should you choose? You might decide to invest fully in one before you max it out, and invest in the other, or invest in both along the way. It depends on your personal financial situation and goals. You might consider talking to a financial planner to see which one makes more sense for you.
In conclusion, RRSPs and TFSAs are both great ways to save for your future, but they have different benefits and drawbacks. Make sure to do your research and figure out what works best for you. Happy saving!
