Your Money Matters


February 2011 Issue


RRSP? TFSA? RESP?

When it’s time to decide which mix of savings vehicles is right for you, your options can start looking like a hearty bowl of alphabet soup. There are Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs). Determining which savings plan, or combination of savings plans is best depends on your personal situation and your objectives.

Until 2009, most Canadians held their retirement savings in an RRSP, where they could claim a deduction for their contributions and then defer tax on withdrawals until retirement. The introduction of TFSAs has provided another powerful savings vehicle that allows investment growth to accumulate and be withdrawn at any time tax-free. Unlike an RRSP, you cannot claim a tax deduction for the contributions you make to a TFSA. On the plus side, if you need to withdraw money from your TFSA, you have an opportunity to replace that money because all TFSA withdrawals are added back to your unused contribution room in the following year.

If you are saving for retirement, then you may be torn between an RRSP and a TFSA. Ideally, you would maximize contributions to both, but if that’s not an option here are some thoughts to consider. Whether the best choice is to save in an RRSP or a TFSA depends on your savings needs, as well as your current and expected future financial situation and income level. Generally, an RRSP is used for saving for retirement, while a TFSA can be used for both saving for retirement and other shorter-term purchases. Because TFSA withdrawals are added back to your available TFSA contribution room in the following year, there is very little downside to using your TFSA savings for mid-sized to large purchases. If you are in a low tax bracket, saving in a TFSA may be more advantageous than saving in an RRSP since TFSA withdrawals have no impact on federal income-tested benefits and credits such as child tax benefits and Old Age Security. On the other hand, RRSPs may be a better option if your tax rate at the time you contribute is higher than it will be when you withdraw your savings. You’ll benefit from a tax deduction when you make your contribution and withdrawals will be taxed at your lower future rate. If the reverse is true, a TFSA can provide better results.

If you are saving for your child’s education, then you are probably weighing the pros and cons of an RESP or a TFSA. For children under age 18, RESPs are the preferred savings vehicle because of the CESG (Canada Education Savings Grant). For children over age 18, the CESG no longer applies so you may want to help them start their own TFSA. If you want to maintain control over the funds, then you could save for their education in your won TFSA instead.

You may choose one savings vehicle over the other, or you may want to save in a combination of two or more plans. Your own personal situation will be the determining factor.

For more information, and to determine the right savings vehicle for your needs, give us a call..


Theresa Wever and the Money Concepts Team.

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