In the world of savings and investments, there are two kinds of accounts that cause a lot more stress than they need to. These account types are the Tax-Free Savings Account (TFSA) and the Registered Retired Savings Account (RRSP), and the pressure comes from wondering which one to choose, a TFSA or an RRSP.
The good news is that the choice is relatively simple to make and depends on your personal goals and finances. For some, you’ll want one or the other. For others, you may want to utilize the tax savings benefits of both account types.
Here’s the explanation of a TFSA and RRSP and which one is right spending on your situation:
An RRSP is a tax-deductible account. What this means is that if you’re making $96,000 a year and you make a $15,000 contribution into your RRSP, you could end up only paying taxes on $81,000. Also, this would bump you from the 26% tax bracket into the 20.5% bracket. Later on, in retirement, when you pull your savings out, you’ll ideally be in a lower tax bracket. This will result in paying fewer taxes on this money that you saved and invested.
It’s important to note that if your money is being invested while in an RRSP, the money you pull out later will be taxed. This means the money you’ve made on top of your original investment will also be taxed.
A TFSA, on the other hand, is a tax-free account. This means that you’ve already paid the taxes on the money in this account, so when you pull it out later, there’s no tax to pay. If you saved $10,000 a year and invested this money, you don’t even have to pay tax on the money earned from the investments.
If you have the financial ability to use both a TFSA and an RRSP, do it. By bumping yourself down into a lower tax bracket and maxing out your RRSP contributions, you may end up receiving taxes back, which you can then invest in your TFSA. From there, you can enjoy tax-free investment growth.
One thing that most banks and investment offices may not mention is self-directed TFSAs and RRSPs. Essentially these accounts allow you more flexibility in where you invest and will enable you to invest in more alternative investment types, such as MICs — or mortgage pooled investments.
If you know what kind of savings plan is right for you and you want to see how a Mortgage Investment Corporation can help you get the most out of a TFSA or RRSP account, get in touch with Jordan on our team today.