RRSP vs TFSA: What they are, and which is best for retirees
As published on SaltWire.com, January 26, 2022
Most people who are thinking ahead to retirement have asked the question: “RRSP or TFSA?”
There are benefits to both types of retirement income planning, depending on your retirement goals and your forecasted retirement tax bracket.
In retirement, Canadians still can’t escape the tax collector. Even though your working years are done, you will still have a taxable income. Canada Pension Plan (CPP) and Old Age Security (OAS), as well as any company pension, rental income, and Registered Retirement Income Fund (RRIF) withdrawals, are all taxable.
But what about tax-free retirement income? This is where you can maximize the benefits of a Tax-Free Savings Account (TFSA) because funds withdrawn from a TFSA are always tax-free.
Tax-deferred or tax-free?
One of the basic distinctions between a Registered Retirement Savings Plan (RRSP) and a TFSA is that money invested in an RRSP is taxable upon withdrawal while money invested in a TFSA is not.
For that reason, opening an RRSP may be a good option if you are in a high tax bracket now and plan to withdraw those funds when you are in a lower tax bracket after retirement.
However, if your taxable income after retirement will not be significantly lower, the TFSA can be your best friend because of those tax-free withdrawals.
The current contribution limit for your RRSP is 18 per cent of the previous year’s income or the annual limit of $27,830 — whichever is lower. Your RRSP contributions are tax deductible, meaning you can use them to reduce the amount of tax you pay on your annual income at the time of contribution when you may be in a higher tax bracket.
This allows you to defer that tax to retirement, when your income and liabilities are reduced. And, you could stash that tax refund in your TFSA to accumulate.
The 2022 contribution limit for your TFSA is $6,000. Unused contribution room rolls over from one year to the next, so, if you’ve not yet contributed to a TFSA, you could make a total contribution of $81,500. On top of this, you can continue contributing to a TFSA indefinitely, compared to RRSP contributions, which stop at age 71.
Avoid old-age security claw back
OAS is a monthly payment made to Canadians over the age of 65 and is considered taxable income. If your net annual income exceeds $79,054, however, you will have to repay a portion of the OAS payment.
Many people don’t realize until the tax bill is coming due that OAS must be repaid by 15 cents for every dollar beyond that threshold amount. That means, for higher-earning retirees, a TFSA can be particularly beneficial because funds drawn from a TFSA are not considered taxable income.
Don’t leave your loved ones a hefty tax bill either. If you designate a child or grandchild as beneficiary to your TFSA assets, they will be paid outside of the estate tax-free.
TFSAs offer significant tax advantages, but the annual contribution limit is lower. In your high-earning years, it may be best for you to maximize your RRSP contributions and then tuck away any extra in your TFSA. It is also important to note that many employers match contributions to a group RRSP, which can significantly increase savings.
So, maybe it’s an RRSP for tax deferral, maybe it’s a TFSA for tax-free withdrawals, or maybe it’s both – the decision on which type of account is right for you is based on many individual factors.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.