Retirement chronicle - Chronicle N°20

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RRSP or TFSA, which one should you choose?

  Since the arrival of the tax-free savings account (TFSA), some investors have found themselves grappling with a new dilemma: is this new type of tax-efficient account better for their retirement savings than an RRSP? Let's take a closer look.

Younes Marach: Financial planner


Let us begin with the TFSA, which can be used to save for a wide range of projects. Its main advantage: investment returns and account withdrawals are tax-free. Given that you can withdraw the funds invested without generating a tax impact, a TFSA can be attractive both for short-term and long-term projects.


However, RRSPs should be preferred for long-term projects, specifically retirement. In contrast to a TFSA, contributions to an RRSP are deductible from taxable income, and the returns in an RRSP accumulate tax-free until withdrawal. This makes an RRSP beneficial if the tax rate you pay upon withdrawal is lower than the deduction rate in effect when the contributions are made. In other words, an RRSP is good for most people, as one's income is higher during the working years than it is during retirement, so the tax rate paid in retirement is lower.


In some cases, to accumulate savings, it may be preferable to invest in a TFSA. Contributing to an RRSP offers major tax benefits but also has repercussions on the social security measures to which citizens have a right, such as the Old Age Security pension (OAS) and the Guaranteed Income Supplement (GIS). For some people-and for GIS beneficiaries in particular-there are no advantages to drawing income from an RRSP. Because the amounts withdrawn from the RRSP are taxed, GIS benefits are reduced as a result. Such individuals are better off investing in a TFSA.


In other cases, particularly students with low incomes, it is generally preferable for them to invest their savings in a TFSA. They will always be able to transfer the accumulated amounts into an RRSP later in life.


There are two important factors to consider when choosing between an RRSP and a TFSA: why you are saving, and your tax rate. Because it is not always easy to weigh the pros and the cons of each of these accounts, I recommend that you ask an advisor for assistance, who will surely be able to shed some light on the issue.


Younes Marach

Financial planner

National Bank

Organizations: Retirement chronicle National Bank

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