Should you place your savings in a TFSA, and RRSP, or should you go for both?

It’s a question you need to know the answer to, in order to get the most out of your hard-earned cash. If you go down the wrong route, you could be missing out on great interest rates and security for your money.

In days gone by, all of this was easy. You chose a standard account for your savings, and you were paid a small amount of interest. You could also withdraw cash from your account whenever you wanted. If you didn’t want this route, you could put your cash in a retirement plan, called a RRSP. It was a choice that didn’t require agonizing over.

These days however, things have changed. Since the 1st of January 2009, the Government implemented the TFSA. This is a Tax Free Savings Account, which allows you to earn money through income from investments, without paying tax on it. This is a huge saving.

How Does it Work?

Basically, any money you pay into an RRSP in that particular year will lower your personal amount of taxable income. So that means that by utilizing RRSPs, you’re paying a lower level of tax. If you are someone who receives a regular salary from work, e.g. a regular employees, you will usually find yourself with a refund on your tax at the end of the tax year.

As with anything related to tax, there are many ‘if this’ and ‘maybe thats’, which can make understanding it all quite difficult. There are also rules on how much you can pay into your RRSP within a year, and when you can take cash out. It’s a good idea to really read into RRSPs before deciding whether or not they are for you.

On the other hand, we have TFSAs. These are the polar opposite of what we have just talked about. With a TFSA you do not have any tax refund from the Government, but you are allowed to withdraw cash at any time, tax-free. This is also an easier option in terms of rules, as there aren’t as many restrictions on how much you can withdraw and how much you can pay in. This is a more flexible option.

So, which should you go with? It’s a totally personal choice, and it depends entirely on your circumstances. Both of these options are designed to help you achieve your savings desires and goals. How you go about that is a decision, which only you can make. If you are an employee of a company, contributing some cash to an RRSP is a good idea, because you are likely to receive a refund on your tax, and it could be a large lump sum in some cases. If you prefer a more flexible savings product, the TFSA is the best choice for you.  

Read into detail about both, ask for advice and think carefully. Your savings are designed to grow, but they could also help in terms of lower tax amounts paid over time.

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- The Capex Team