As tax season approaches, it is important to talk about important money matters. Something you might be wondering is whether you should put your extra money in a tax free savings account (TFSA) or a registered retirement savings plan (RRSP). AAJ Magazine has some helpful tips and advice to assist you in your upcoming decisions.
A TFSA is a savings account where you can put your money and let it grow in eligible investments. Any money you “make” off these savings (interest, dividends, capital gains) is tax-free for life. You can withdraw your money at any time, for any reason, and the withdrawals are tax-free. TFSAs do not affect your annual tax filing whatsoever. They are a good place to put your money if you want it to grow, and if you want to be able to access it whenever, hassle-free.
RRSPs on the other hand, are highly valuable during tax time. Putting your money into RRSPs is a good way to receive a better refund (or lower owing balance) during tax time. However, there are important deadlines. For instance, for the 2017 year (which you will file taxes for in 2018), you need to put money into RRSPs between January 1, 2017 and December 31, 2017; or the extended deadline between January 1, 2018 and February 28, 2018. Any money you put aside during these periods will be claimed for your 2017 tax year as non-taxable income.
It is important to note that RRSPs are less accessible than TFSAs. If you withdraw money from your RRSPs, you will be charged a withholding tax at the time of the withdrawal, which ranges between 10% to 30%, depending on how much money is withdrawn. You will also be dinged at tax time, as the money withdrawn is considered “taxable income.” These tax-time costs depend on your income and overall tax situation. Furthermore, sometimes there are limits as to the “reasons” for which you can withdraw the money. For example, if your RRSPs are managed by your employer, you may only be able to withdraw them for the purchase of a home, or for tuition fees. In addition to this, money must usually sit in an RRSP account for 90 days, before it can be accessed for a purchase.
When deciding between a TFSA or RRSP, assess your overall household situation, and see what works best for you. You can also talk to a financial advisor or tax planner for advice.