Since Tax-Free Savings Accounts (TFSA) debuted in Canada a few years ago, many have started asking an important question: should I put my money into a TFSA or into a Registered Retirement Savings Plan? Many finance experts have differed, but in the end it really depends on your income.
According to a poll released in 2012, close to half of all Canadians hold a TFSA, but most of these depositors aren’t even using them. Most of the account holders are either using a TFSA to save money for a major purchase or as a retirement account. Both are excellent options, but the TFSA can be a lot more beneficial to most than an RRSP.
Canadians have an annual contribution limit of $5,500 - $5,000 prior to last year – and any unused TFSA limit can be carried over to the following year. For instance, if you haven’t deposited any money into a TFSA then you could save up to $25,000 this year, a sum that certainly shouldn’t be tossed to the side.
Financial institutions and government officials have been pushing RRSPs for years and it was the go-to retirement plan. Each year, you get a tax credit, but if you decide to withdraw now or at your retirement then be prepared to pay an astronomical sum of taxes. With TFSAs, depositors aren’t hit with fees or taxes upon withdrawal.
Essentially, if you’re not making a large annual income – less than $50,000 a year – then a retirement TFSA might be the right choice for you because of its simplicity and accessibility. Also, despite the artificially low interest rates being inflicted upon the Bank of Canada, TFSAs come with higher rates of interest, especially at around the beginning of the year – ING Direct is offering a 2.5 percent interest rate on new deposits on TFSAs until April.
When it comes to investing in a TFSA, it could very well be the fact that people don’t understand it. An example that is commonly provided is that investors just believe TFSA is a glorified savings account when in fact it can hold much of the same investment vehicles as an RRSP, such as mutual funds, stocks, exchanged traded funds (ETFs) and Guaranteed Investment Certificates (GICs).
Polls find that TFSAs are gaining momentum in Canada, especially among the youth. However, banking professionals say the best option is to pour money into both if you can because the more savings for retirement the better it is for you.
“Maybe it’s a quality of life decision or maybe it’s truly just there is not the availability of income or assets to contribute to both,” said John Tracy, senior vice president of retail, savings and investing at TD Canada Trust. “Both is a great answer when you can do it.”
In the end, be sure to make saving a regular habit, no matter where it’s being deposited: establish an automatic savings plan, cut back on your monthly expenses, get a part-time or freelance job and live within your means. Having a bloated piggy bank will make you happier than any 100” television can.