Introduction to: Tax Free Savings Accounts and Registered Retirement Savings Accounts. What are Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP)? Short Answer ? They are both tax effective vehicles for Canadians to save Longer Answer? Let me try to explain….
Introduction to:Tax Free Savings Accounts and Registered Retirement Savings Accounts
What are Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP)?Short Answer ? They are both tax effective vehicles for Canadians to saveLonger Answer? Let me try to explain….
TFSA’s were created by the federal government in 2009 and are available to all Canadians 18 yrs. or olderRRSP’s were created in the middle of the baby boomer years (1957)Both TFSA’s and RRSP’s allow savings to grow in an account “Tax Free”
Example of “Tax Free” Savings Growth
Based on investing $1,000 per year for 20 years with 5% compound interest (assumes middle income tax rates)
TFSA investments are made after you pay tax on the money
RRSP investments are made with money that you don’t pay tax on, since the investment is tax deductible
So which account is better?Short Answer ? It depends, but both are good…Longer Answer? It depends….
There a several factors, however your tax rates at the time of deposit and time of withdrawal are the most important-this information may not be known…
If the money is to be used for a purchase like a house or car, the TFSA is best since the contribution room does not go away if you make a withdrawal
With the disappearance of “Defined benefit” pension plans-both TFSA’s and RRSP’s are needed to save for retirement
Investments that can be held in TFSA or RRSP accounts
Both accounts can hold:
Cash (very low interest rate)
Guaranteed Investment Certificates ( low return 1.25-2.6%-but safe)
Bonds (less secure than GIC 2.5-4.5%)
Mutual Funds (higher risk depends on fund type can be 5-10%)
Exchange Traded Funds (similar to mutual funds but lower cost to own)
Individual Stocks (Generally the highest risk, but highest return potential)
What you hold depends on the when you need the $$ and your appetite for risk
My personal preference is Exchange Traded Funds
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