Understanding RSPs and TFSAs (video)
Written by Tangerine
Tuesday, February 23rd, 2016
Do you know the difference between RSPs and TFSAs? That's ok. You're not alone. Both TFSAs and RSPs can consist of savings accounts, GICs, stocks, or mutual funds. And they're both designed to help you save.
1. Boosting the Power of Saving
The 2 main things that impact your ability to save well are Inflation – which steadily reduces the real value of your savings over time, and Taxes – which reduce the amount you can save from your paycheque, and reduce return on your investments.
Both RSPs and TFSAs help you battle these forces. But they each do it differently.
Let's break it down…
So, what exactly is a Registered Retirement Savings Plan? (You'll see these called RRSPs and RSPs - both are essentially the same.)
As the name suggests, the Government created RSPs to encourage you to save for your retirement.
The money you hold in your RSP is tax-deferred – protected from income tax – until you withdraw it when you retire – at which point, your tax bracket will likely be lower, so the money will be taxed at a lower rate than when you earned it.
The amount you contribute to an RSP can be claimed to reduce your taxable income. For many people, that means a refund at tax time.
3. Why it makes sense to have an RSP
You get a tax deduction for your contributions, which can bring you a tax refund that you can then set aside as more savings.
Also,if you're a first-time homebuyer, you can withdraw up to $25,000 from your RSP as part of the Federal Government's Home Buyer's Plan.
What exactly is a Tax-Free Savings Account?
It's a way of saving money for both long and short-term goals, without having to pay income tax on the growth.
You don't pay tax on money you withdraw from your TFSA either. That's what makes it “tax-free," and not “tax-deferred".
That means you'll be able to keep all of what you save.
5. Why it makes sense to have a TFSA
Unlike an RSP you pay no tax when you withdraw from a TFSA.
It's suited to both long or short-term goals, making it great for everything from emergency funds to long-term saving.
If you're in a lower tax bracket, RSP tax deductions may not be a priority for you, and you may prefer to save tax-free.
6. How do I Choose
So how do I know which one is right for me?
Here are some of the main considerations:
If you're in a high tax bracket now, and think you'll be in a lower tax bracket down the road, RSP contributions probably make more sense right now.If you're in a low tax bracket now, and think you'll be in a higher tax bracket down the road, consider a TFSA for now.
If you think your tax bracket now will remain steady down the road, your decision may be based more on whether you prefer an up-front refund on your whole contribution with an RSP, or the greater flexibility of a TFSA.
7. RSP and TFSA dos and don'ts
Here are a few general tips.
Don't be reluctant to start saving. Even small amounts add up over time.
Do save on a regular basis: stay committed. Automatic transfers can help.
Don't treat your TFSA or RSP like a regular savings account. Rules and tax implications impact when and how you should access this money.
Do know your money personality. Set realistic goals that will work with your spending style and habits.
Do save an emergency fund outside your RSP. RSPs are meant for long-term security, not for quick cash.
Now that wasn't so hard, was it?
For more detailed information on RSPs and TFSAs, download our guide.
This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content....
The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.
Tangerine Investment Funds are managed by Tangerine Investment Management Inc. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of Tangerine Bank. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.