Let’s start with the Tax Free Savings Account (or TFSA). A lot of clients we talk to seem to have the misconception that you get a TFSA at a bank, and make a percent or two in a high interest savings account (if you’re lucky). The fact of the matter is that a TFSA is just another vessel to invest your money, just like an RRSP. Think of it as another hat to put mutual funds, stocks, bonds, and high interest savings accounts into. A TFSA seems to be advertised as a short term or emergency savings vessel, but that is not its only purpose. This plan can work hand in hand, and compliment your RRSP objectives.
One key thing to remember is that, unlike an RRSP, the funds you put into your TFSA are “after-tax dollars”. So the money you invest there grows tax-free, and you can withdraw the money anytime, again tax-free. Even if it doubles in value.
An RRSP on the other hand; is taking your before-tax money, giving you a tax deduction, and allowing you to grow your money tax-deferred. Upon withdrawal, you will pay tax at that time (hopefully at a lower rate than when you put it in and received a deduction).
Let me elaborate. The objective with an RRSP is that while you are working, you are probably in a higher tax bracket, and can benefit from the immediate deduction now. When you are retired, it is thought you would be in a lower tax bracket, so you would be able to withdraw those funds at a lower rate; saving tax that you have deferred all these years. However, when the RRSP began in 1957, there was no other option for retirement savings. The good little savers who diligently contributed the maximum to their plans every year while they were working, are now retiring with a similarly high income. What does that mean? That means they may be paying the same amount of tax on that money in the end; so the benefit is only the tax deferral (not tax reduction) of the growth—paying tax later rather than now. With the inception of the TFSA, it really has added another great saving vessel for your retirement. For low income earners the TFSA may actually be the preferred method of retirement savings. Talk to your financial advisor to decide which is best for you.
Good timing for me to see all this
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