Continuing on with the discussion about TFSA's and RRSP's, we consider which one is best.
There is no single answer. It is not an either-or situation. Both plans have tax advantages, but some are greater than others, so it depends on your financial situation. You can use both plans if you have the capital to do so.
You can contribute to either plan anytime throughout the year; however, to take advantage of a tax deduction for 2021, you must contribute to an RRSP by March 1st of 2022.
The first consideration is what you plan to do with your money in the long run. When you consider all aspects, the decision will depend on your savings goal and time frame. The main difference between an RRSP and a TFSA is that a TFSA is a tax shelter, and the RRSP is a tax deferral.
A TFSA is a savings plan where investment gains are not taxable either held in the account or when you withdraw funds from the account. With an RRSP, gains are not taxed until you withdraw funds from the plan. The idea is that you would not need to access those funds until you are retired and in a lower tax bracket.
Points to consider include:
- Which plan maximizes your tax break?
- Which one is more flexible?
- What are the contribution limits?
- Which one has the highest return?
When deciding, there are some basic rules of thumb. That is why one should consult an investment advisor before choosing, as they can have different approaches when helping clients resolve this issue.
Contact us if you have questions on how it would affect your tax situation.