TFSA(Tax Free Savings Account) vs RRSP (Registered Retired Savings Plan)

TFSA(Tax Free Savings Account) vs RRSP (Registered Retired Savings Plan)
Since the year is drawing to a close and many have asked me the benefits and eligibility of Tax Free Savings Account (TFSAs), here is a short rundown. First of all, TFSA is really a misnomer because one can not only put money into a savings account but can also invest money in mutual funds, bonds, stocks and other investment vehicles. Until the end of this year the total limit to contribute is $15,000.
Almost three years ago, on Jan 2, 2009, a new tax saving vehicle was introduced by the government. This relatively new Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
Here are a few salient features:
  • Contributions into a TFSA account can only be made in Canadian dollars. No foreign currency contributions are allowed.
  • Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.
  • The $5,000 annual contribution limit will be indexed to inflation in $500 increments. At the current rate of inflation, the annual limit may increase to $5,500 in 2012
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates into future years.
  • If a person has contribution room, but no funds to contribute, they may contribute funds given to them by their spouse or common-law partner, with no attribution of income to the spouse
  • Full amount of withdrawals can be put back into the TFSA in future years(not in the year of withdrawal) starting a year after which the withdrawal is made
  • Choose from a wide range of investments options such as mutual funds, Guaranteed Investment Certificates (GICs), stocks, bonds and cash.
  • Contributions are not tax-deductible.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death, without affecting the contribution room of the survivor.

What is better – TFSA or RRSP?

The RRSP and TFSA have almost equivalent results when the marginal rate for RRSP contributions is the same as for RRSP withdrawals.

The RRSP is better if the marginal tax rate for RRSP withdrawals will be lower than the marginal tax rate when contributions are made

The TFSA is better if the marginal rate for RRSP withdrawals will be higher than the marginal rate for contributions

The TFSA will be useful in some situations such as

a) when there is no RRSP contribution room available
b) keeping savings available for emergencies
c) for short term savings goals such as a vehicle, appliances, vacations etc.
d) also seniors who are not eligible, because of age, to contribute to an RRSP can make good use of the TFSA.

For more detailed information please call Lachman Balani of Shah Financial Planning Inc. at 416-902-3580 or email at:

Have a happy investing season!

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