TFSA vs RRSP, The Sequel
A few weeks back, this blog looked at BMO Financial's take on the relative merits of the RRSP and the new Tax Free Savings Accounts. Scroll down to the bottom half to find the comparative chart prepared by BMO's head of retirement strategies Dina Di Vito. My own spin was that the vast majority of Canadians need to maximize both vehicles if they wish to be among the 25% of Canadians RBC expects to ever attain a "dream" Retirement. A similar column ran in various Canwest dailies on Jan. 22.
Yesterday, CIBC's managing director of tax and estate planning, Jamie Golombek, weighed in on which of these "two great investment opportunities" is right for you. Given that the March 1st RRSP deadline is looming, the question is certainly top of mind.
"While the RRSP has long been the go-to retirement planning solution for most Canadians, the arrival of the TFSA presented investors with a new, highly flexible savings vehicle with a seemingly endless number of practical applications," says Golombek, "And for those who did not open a TFSA last year, they now have the opportunity to contribute up to $10,000 in 2010."
As is customary with this blog, the text across from and below Jamie's photo is in his own words, and italicized to make clear his authorship. So over to you, Jamie:
The case for TFSAs:
While the TFSA is an effective investment vehicle for virtually any purpose, its higher liquidity and lower annual contribution limit may make it more useful to some as a short-term savings option for a major purchase or an emergency fund as you can withdraw anytime without tax repercussions.
Plan characteristics include:
• Canadians 18 or older can contribute up to $5,000 annually to a TFSA and invest in GICs, mutual funds and other eligible investment vehicles.
• Earnings and withdrawals are tax-free
• Withdrawals can be made at any time (depending on the investments chosen), for any reason
• Funds withdrawn can be re-contributed beginning the following calendar year
• Withdrawals don't affect your eligibility for federal income-tested government benefits such as the GST credit or Old Age Security
• Any unused contribution room can be carried forward from year to year
• Contributions are not tax-deductible
The case for RRSPs:
The most appealing advantages of the RRSP are that contributions go towards reducing your taxable income while you earn tax-sheltered growth on assets and earnings held within the plan. RRSPs can also be used for other purposes beyond retirement, as some funds can be accessed tax-free if withdrawn towards the purchase of a first home or to pay for
post-secondary education.
Plan characteristics include:
• Qualified investments earn tax-deferred compound growth
• Contributions are tax-deductible
• Income earned in your RRSP is tax-sheltered until withdrawn
• Your unused contribution room can be carried forward indefinitely
• Income splitting upon retirement can be achieved through a spousal RRSP before age 65 as opposed to pension income splitting from a RRIF, which can only be accomplished from age 65
Investors closer to retirement who expect to retire to a reduced income and taxation level should make their RRSP a priority. Any money leftover after making your maximum annual RRSP contribution can always be put towards a TFSA.
Investors also need to consider the importance of liquidity when weighing their options: You need to examine your own financial needs and goals and know how much liquidity you require as the tax consequences of early RRSP withdrawals can result in the temporary loss of income-tested benefits and permanently reduce your contribution room. A financial advisor can help you align your investment options to your goals and work with you to develop a long-term financial strategy.
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Source The Wealthy Boomer : Retirement
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