Ellen Roseman: TFSA vs RRSP, which is right for you?
- February 17, 2010 8:59 AM |
- By Ellen Roseman
It's just 10 days until the RRSP deadline for the 2009 tax year. But now you have an alternative, the tax-free savings account or TFSA.
Which tax break is better? I'm an RRSP saver, but I've also written many columns in the past urging the federal government to introduce a more flexible option, similar to the Roth IRA in the United States.
The RRSP doesn't suit everyone. It lets you defer tax on your income during your prime earning years and pay the tax when you're retired. But if you expect to be in a higher tax bracket later in life, you won't find the RRSP beneficial.
Or suppose you end up with a low income when you retire. Your RRSP withdrawals can hurt you, since they're added to your income and can make you ineligible for means-tested benefits, such as the guaranteed income supplement.
If you plan to retire within two to five years, it makes little sense to add money to your RRSP since you'll be taking it out soon. Your withdrawals will be fully taxed and you will have no control on the timing and amount of your withdrawals.
The tax-free savings account puts you back in control. Unlike the RRSP, the TFSA won't provide a tax deduction on contributions or a tax refund. But you'll never have to worry about getting taxed on the money you take out of the plan.
Moreover, any money that comes out of a TFSA can be replaced the next year. This is unlike an RRSP, which generally doesn't allow you to replace withdrawals made in previous years.
The TFSA is ideal if you're saving for short-term goals, such as a vacation, car or home renovation. You earn very low rates of interest and end up with nothing once taxes and inflation are factored in. So, why not save tax-free if you can?
However, if you're saving for a down payment on a first home, the RRSP is still a better bet. You and your spouse can withdraw up to $25,000 each tax-free and interest-free from your plans and pay it back over a 15-year period.
Finally, there's the double-dip strategy. First, you put money into an RRSP by March 1. Then, you use your tax refund when it arrives for a TFSA contribution. For some savers with limited means, this will be the best of both worlds.
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