Since 2009 Canadians have had access to a powerful tool called the Tax Free Savings Account (TFSA). In this savings account all investment income grows tax-free for life. This makes the TFSA very appealing to many Canadians but it can be difficult to decide whether to use your TFSA or RRSP for your long term retirement planning. The right decision can make a difference of $10,000’s or $100,000’s in your ability to save. The answer depends on your marginal effective tax rate today and in retirement, the amount of government benefits you expect to receive and other factors. Go here ex-ponent.com/
The main difference between an RRSP and a TFSA is that an RRSP allows you to defer taxes on your contributions. This is very important if you expect to be in a lower tax bracket in retirement than your current one.
TFSA vs. RRSP: A Complete Guide for Canadian Investors
TFSA’s are more useful for short- to medium-term goals, like a down payment on a home or a vacation with friends. “If you have lots of RRSP withdrawals and are running out of contribution room, it may make sense to switch some money into a TFSA and pay less tax,” Munro says. This strategy also works if you have investments in an RRSP that are taxed at higher rates, such as GICs or money market funds. This article was prepared by TD Wealth.