Registered Retirement Savings Plans (RRSP) VS Tax Free Savings Accounts (TFSA) what to do!

RRSP (Registered Retirement Savings Plan)or TFSA (Tax Free Savings Account)

Most people who want to save for retirement will have this argument with themselves over time, and "time" it seems is really the key to determining whether or not you should contribute to your RRSP or to your TFSA in any given year.


Firstly let me point out what should be obvious to our readers now.  These are not "Savings" accounts so much as they are "Investment" accounts.  Within both vehicles you can purchase most kinds of investments from stocks to bonds, mutual funds, ETF's and real estate in the form of REIT's

Some people believe that splitting savings between these two investing vehicles is a safe bet, but in many instances they would be wrong.

One unique aspect of the Canadian RRSP (similar to a 401(k) in the U.S.) and the TFSA (similar to a Roth IRA in the U.S.) is that there is a "limit" to the contributions you can make in any given year but that limit "carries over" to the following year should you fail to contribute.

This fact alone should tell you how to best invest your money at different points in your life and career.  For instance, when one is a young adult, say in your 20's, it is common that your income is much less than it will be later in your life, say in your 40's and 50's which are usually you "maximum" income years.

Knowing this, one simplified plan is to contribute as much as you can to your TSFA in those early years when your income is low, then, depending on your personal circumstances, gradually switch to the RRSP as your income increases later in life.

Why? Because it is better to reduce your tax burden on the higher income rather than the lower income, and the accumulation of contribution room over years, allows for a much larger RRSP deposit, thereby reducing your tax burden even further. Tuned in Canadians know that reducing your tax burden is a big part of retirement saving and planning.

If you were prudent and maxed out your TFSA during your 20's and into your 30's, "and" you invested well in that account ( It is really a tax free "investment" account, not just a savings account)
then you would have a considerable amount in your TSFA to tap into to ensure you max out your RRSP at the top end of your income earning years.

Here is a good primer on this very issue courtesy of  BNN.

Is the RRSP headed for retirement?

Reviewing the best investment vehicle ever made! for the Average worker.

Image via Wikipedia

In January, Canada introduced (What the banks like to call) the "Tax Free Savings Account". It is, in every sense of the words, a TAX FREE "INVESTMENT" ACCOUNT! (similar to a Roth IRA in the U.S.)

When I say it is the best investment vehicle ever built for the "average working stiff", (arguably, the rsp is a close second) that is because it has a limit of $5,000 per year that you can put in the account. Large and institutional investors aren't very interested, but I sure am, and so should you. Now here's why!

In this "after tax account" you can put cash, GIC's, money market funds, mutual funds, stocks, bonds or just about anything trading in the capital markets. Now here is the "Golden" part: Every single dollar you make in this fund is "TAX FREE" when you draw it out. Let me repeat that and expand upon it. In Canada, where the nominal tax rate for many middle class workers is 42%, your savings (read investment)income will not be taxed!!

You can put a maximum of $5,000 into this account every year and in the years which you find yourself short, you carry that amount into the proceeding years. In January I opened two such accounts one for me and one for my wife. We transferred the limit into each. In one account I bought stock in my favorite company (see previous posts) and since January, I have to date, booked a gain of 61%. That money is TAX FREE when I take it out!

Now even if you use this account in a more conservative fashion, let's say you buy an Index fund, or any mutual funds and you book 8% per year. When you draw it out it is, as I enjoy saying, "TAX FREE".

One of the best strategies for increasing wealth is to reduce your tax burden where you can. I have never seen a better vehicle for this strategy, for the average working stiff, since the advent of the RRSP (u.s. equivalent 401K).

If you haven't already, go (no run!) to your nearest bank or investment house and set up one of these accounts immediately. Fill it with your yearly quota faithfully, every year. Spread your investments around in it so that your retirefund is not all in one basket (buy stocks, bonds, mutual funds etc) (let me correct that, stay away from bond funds this year) If you are in your 20's (those who are truly in the "drivers seat"! more in future blogs) and you don't know much about investing, buy index funds initially. Do it every year, and your retirement will be sweet indeed.

Even if you are just saving up for a major purchase like a car, a home etc, this is the vehicle to use. So, USE IT!!

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• Two strategies to better your returns (thestar.com)
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• Dan Solin: The Untold Story: Separating You from Your Money (huffingtonpost.com)
• Retirement Savings Options: 401(k) Matched, Roth IRA Maxed, Now What? (frugaldad.com)
• An early start on good saving habits (money.cnn.com)

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