The RRSP is an investment vehicle that offers very attractive tax advantages. However, this is not always the best option and sometimes the TFSA would be more suitable.
Every year, many Quebecers contribute to their RRSP without asking too many questions. It must be said that it is a tool of choice to obtain a generous tax deduction, even if we often forget that the amounts are taxable when withdrawn.
“The TFSA is also advantageous because even if the deposits do not qualify for deduction, no tax is deducted when the money is paid out, neither on the capital nor on the return,” explains André Lacasse, financial planner at André Lacasse Financial Services.
In what cases is one preferable to the other? As is often the case with personal finance, the answer is: it depends! “We must first ask ourselves what our goals are and whether our retirement savings will enable us to achieve them. Once we have answered these two questions, we can better control our choices,” recommends André Lacasse.
Choose the RRSP
A family with young children is very interested in contributing to their RRSP. In fact, contributions make it possible to reduce taxable income and thus the basis for calculating various allowances, such as the federal Canadian child benefit and the Quebec family allowance. “By reducing your taxable income you will improve the social tax measures you could be entitled to. In certain cases, the return can be up to 70% of the contribution made,” indicates the planner.
Another situation in which the RRSP should be given priority consideration: when the marginal tax rate applied to our income is high. Here, too, it is advantageous to reduce your taxable income and thus your tax rate. “A taxpayer taxed at a rate of 53.3% who contributes $1,000 to their RRSP saves $533 in taxes,” explains André Lacasse. We're talking about a return of over 50%!
Are you considering buying a property or going back to school? The RRSP could help you achieve your goals, as the Home Ownership Plan (RAP) allows you to withdraw up to $35,000 from your RRSP and the Continuing Education Encouragement Plan (REEP) allows you to withdraw up to $20,000 without any tax implications .
Are you an entrepreneur or self-employed person and do not benefit from the company pension scheme? The RRSP should be given priority. “Ideally, we reinvest our tax refund in a TFSA,” advises André Lacasse.
The benefits of the TFSA
The flexible and versatile TFSA is a preferred retirement vehicle. “You should know that above a certain level of income, a refund tax is levied on the old age pension paid by the federal government,” the planner points out. The same applies to the guaranteed income supplement. However, RRSP withdrawals are included in income, which is not the case with TFSA withdrawals, which are tax-free.
So if you already rely on a pension fund to provide you with a comfortable income in retirement, putting funds into a TFSA could prove to be a good choice. In fact, the TFSA allows you to withdraw additional amounts without tax implications.
Another factor to consider: Starting the year after our 71st birthday, RRSPs must be converted into RRIFs and then paid out each year at a percentage based on age. This is not the case with the TFSA, which may or may not be withdrawn at our discretion.
Because TFSA withdrawals are not considered income, they also do not affect tax credits based on taxable income.
Finally, if your salary is low, save in a TFSA rather than an RRSP because you won't benefit from tax deductions. However, you can postpone this until your income increases sufficiently.
ADVICE:
· The TFSA is more flexible than an RRSP and you can withdraw this money whenever you need it. As far as he is concerned, the RRSP should be set up in advance of his retirement as the tax burden will be high if you withdraw it before retirement.
· When buying your first property, don't forget that, in addition to the RAP, the CELIAPP is also an interesting instrument.
· A financial advisor can help you make the best decision based on your personal situation.
Learn more:
Consult the CELI Guide 2024 (servicesfinancierslacasse.com/post/le-guide-celi-2024) and RRSP or TFSA (servicesfinancierslacasse.com/post/reer-ou-celi).