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<\/a>Photo: LendingMemo.com<\/a><\/em><\/p>\nLet\u2019s start with the basics. What are the key differences between an RRSP and a TFSA?<\/h2>\n
When you make an RRSP contribution, you get to deduct that amount from your taxable income. Say you make $60,000 and contribute $9,000 to your RRSP. The government taxes you as if you made $51,000 (resulting in major tax-breaks). That $9,000 (and any other future contributions) can be invested in your RRSP \u2014 in bonds, stocks, mutual funds, ETFs, GICs and the like. Any capital growth will accumulate free of tax while it remains in the plan. Down the road, however, when money is withdrawn from the RRSP, you will have to pay taxes on all of it.<\/p>\n
Your RRSP is designed to help you save for retirement, although there are two exceptions that let you take the money out penalty-free \u2014 to continue education or for a first-time home purchase.<\/p>\n\n
Despite the slightly misleading name, your TFSA is much more than a savings tool. TFSAs can hold almost any investment your RRSP can. And similar to an RRSP, once the money is in the plan, it grows free of tax. The key differences are that unlike your RRSP, you don\u2019t have to pay tax on it when it comes out and you can withdraw the money at any time (including for your downpayment, or say \u2014 that vacation to Hawaii).<\/p>\n
If you have to pick just one, you will want to consider a few factors: your current and future income levels, your short-term and long-term goals, and the flexibility you will need to access those funds.<\/p>\n
Do you make more or less than $50,000 a year?<\/h2>\n
\u201cThe traditional idea behind an RRSP is that you put your money in now, it comes off your net income and you get a tax break. When you take the money out, you will be taxed on it but you’ll be in a lower tax bracket,\u201d says Kevin Klein, Vice President and Investment Counsellor at T.E. Wealth in Alberta. \u201cBut what we\u2019re finding with the younger generation is that if you\u2019re just starting out, you might not be in a higher tax bracket.\u201d<\/p>\n
Klein says TFSAs are generally the better choice for people with modest or low annual incomes. If you\u2019re making less than $50,000 and anticipate earning more in your later years, your RRSP can turn into a future tax burden instead of a benefit.<\/p>\n
With a TFSA, you contribute after-tax dollars. Meaning, unlike an RRSP, the money you contribute is not deducted from your net income and you won\u2019t get a tax break. But you also won\u2019t be taxed on it when you pull it out later \u2014 a blessing in disguise if you anticipate your income will go up in your later years.<\/p>\n
Unlike an RRSP, a TFSA can be used for any type of savings goal \u2014 whether it\u2019s a rainy-day fund, vacation, first-time home purchase, wedding, retirement or anything else you feel like saving for. This is because you can withdraw your funds at any time \u2014 with no tax implications. \u201cThere’s a whole debate between TFSAs and RRSPs \u2014 which is better. TFSAs are a lot more flexible,\u201d explains Klein.<\/p>\n You can contribute 18 percent of your income or $26,230 a year to your RRSP (whichever figure is higher). The Home Buyers\u2019 Plan allows eligible first-time homebuyers to withdraw up to $25,000 tax-free out of their RRSPs. It\u2019s technically a loan to yourself because homeowners will have to start paying the amount back to their RRSP over a 15-year period beginning two years after the initial withdrawal (we explain how it all works in this article<\/a>).<\/p>\n The federal government grew the TFSA contribution limit from $5,500 in 2018 a year to $6,000 in 2019 and it could change again. That sum increases significantly if you are opening an account for the first time. If you were 18 when the program started in 2009, you can put up to $63,500 in a lump sum they get this number by adding up the yearly contribution limit from the past ten years). Whenever you take money out, you also get that room back in your TFSA for more contributions, and if you don\u2019t contribute one year, the allotted funds will carry over to the next. You can pull out as much as you want, and unlike the RRSP \u2014 you don\u2019t have to pay it back.<\/p>\n This is both a blessing and a curse. On the one hand, the flexibility helps you put a real chunk of change towards your downpayment. On the other hand, if your TFSA is your only retirement savings vehicle, there are no immediate penalties for not paying it back. And remember, when you take money out \u2014 you sacrifice the compounded growth of your investments had they been left inside to grow.<\/p>\n \u201cIt really comes down to time horizons,\u201d explains Klein. \u201cIf you’re looking to buy a house in the next six months, year, or even a couple years, you will want to be cautious with where you put your money and how you invest it. If you aren\u2019t planning to buy for 10 or 15 years, you can take more risk.\u201d<\/p>\n In the short term, markets are volatile and subject to wild up-and-down swings. If the market is down when you want to pull the trigger to buy a house, you could end up at a loss. When you are saving for a long-term goal, you can ride out the waves of the market.<\/p>\n If you\u2019re looking to purchase a home in the short- or medium-term, it\u2019s best to go with a risk-free strategy that allows you to withdraw it at any time. \u201cEven though interest rates may be low \u2014 between 1.5 to 2 percent \u2014 that money will still be sheltered from taxes in a TFSA and an RRSP,\u201d explains Klein.<\/p>\n Wilkie Kam, a Vancouver-based investment advisor for BMO Nesbitt Burns reiterates this: \u201cI would recommend a minimum time horizon of three years or above if investing in anything that can fluctuate in value for the purpose of a home purchase. A balanced portfolio usually carries lower risks than a growth portfolio and return higher than a straight-term deposit which suits the purpose.\u201d However, the advisor still cautions doing your homework on the selection of the investment products. \u201cIf poorly chosen, a balanced portfolio can even have larger volatility than a growth portfolio,\u201d Kam explains.<\/p>\n If you currently have higher risk investments in your TFSA or RRSP, Klein suggests bringing the risk down as you get closer to homeownership: \u201cThere are many strategies out there when your time horizons are changing. What people should look for is something that is liquid over time, with no penalties to get in or out of. When it comes to a downpayment, you want to make sure you stay on top of your money and that it’s appropriate given your changing situation.\u201d<\/p>\n<\/a>Photo:\u00a0SeniorLiving.Org<\/a><\/em><\/p>\nWill you need convenient, flexible access to your savings?<\/h2>\n
How much do you want to contribute to your downpayment and your retirement?<\/h2>\n
\r\n SEE ALSO:<\/span>What Canadians need to know about RRSPs and the first-time Home Buyers\u2019 Plan<\/a><\/strong>\r\n <\/div>\n<\/a>Photo: GotCredit.com<\/a><\/em><\/p>\nWhat should your investment plan be in your TFSA or RRSP? Well, that depends on when you plan to buy a house.<\/h2>\n