Money: Tax choices: RRSP or TFSA?

(NC) When it comes to deciding how to best manage your money during investing season, it’s important to have the facts. Many will choose a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). Both options let you contribute money that won’t be taxed (up to an annual and/or personal cap), and let you carry your unused contributions forward. But it’s important to understand that the two products also differ in some important ways:

Like the name suggests, an RRSP is used commonly for retirement savings, and you can get one after you are the age of majority in your province. RRSPs also allow you contribute more per year than TFSAs do. RRSP limits change annually but usually 18 per cent of the income you listed on your previous year’s tax return – or $27,830 as of 2022, whichever is lower.

An RRSP is designed to “mature” at the end of the year you turn 71, at which time it is converted to a Registered Retirement Income Fund (RRIF). Withdrawals from RRSPs and RRIFs are taxable, with a few exceptions.

A TFSA is used for general savings and is often intended to be used for a shorter term than an RRSP. The gains on your account won’t be taxed and there’s no limit to how much you can remove, so it’s a great way to save for a big purchase.

To open a TFSA, you’ll need to be a permanent resident of Canada, have a valid SIN, and the age of majority in your province or territory, so if you start working as soon as you’re legally able, you’ll need to wait a few years before a TFSA is an option for you. The contribution limit for a TFSA is lower than an RRSP: the 2022 limit is $6,000, and there is a penalty for over contribution, but your contribution limit is cumulative from the time you are 18.

With the deadline to make RRSP contributions for 2021’s income coming soon, it’s important to make informed financial decisions. Book a virtual appointment with a financial advisor and make the most of the time left before the deadline. It could make a big difference when tax season comes.

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