RRSPs

RRSPs are designed for the specific purpose of accumulating retirement income and offer two significant benefits:

• The amounts you contribute are deductible from your taxable income, which may entitle you to a tax refund.
• The returns generated by your investments are not taxable provided your investments remain in your RRSP.

You may contribute up to 18% of your earned income or the maximum allowed under the Income Tax Act. If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.

Other ways to use RRSP funds (subject to certain conditions):

• Buy a new property under the Home Buyers’ Plan (HBP)
• Go back to school, taking advantage of the Lifelong Learning Plan (LLP)

TFSAs

Although contributions to a TFSA are not tax-deductible, the advantage is that you won’t have any tax to pay when you make a withdrawal.

Here are the some of the main ways in which TFSAs differ from RRSPs.

• The amounts you withdraw can be contributed back into the account as of the following year.
• The amounts you withdraw are not taxable. You make withdrawals at any time without affecting any government benefits.
• There is no age limit for making contributions.

Unlike RRSPs, the maximum contribution is not dependent on your income; rather it is a fixed amount determined each year by the government regardless of salary. If you do not contribute the maximum amount each year, the unused portion of your contribution room accumulates from year to year.

RRSP or TFSA?

Consider your needs and your income when making your decision. Since withdrawals from your TFSA won’t affect government benefits, this might be a good option for you if you don’t think your retirement income will be very high. Your RRSP, on the other hand, allows you to plan the amounts you withdraw more easily, which can be practical if you are not as disciplined.

You can also combine the two and use your RRSP for your main retirement income, while keeping some money in a TFSA to cover any unexpected expenses without affecting your taxable income.