How are tax-free savings accounts different from registered retirement savings plans? James Fitz-Morris explains your options.
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TFSAs vs. RRSPs: Which is the Better Investment Option?
When it comes to saving for retirement or other long-term goals, Canadians have two popular investment options available to them: Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). Both these plans have their merits, but understanding the differences between them is crucial in making the right investment choice.
A Tax-Free Savings Account (TFSA) allows individuals to save and grow their money tax-free. Any investment gains, interest, or dividends earned inside a TFSA are not subject to taxation, and you can withdraw funds from your TFSA at any time without paying taxes on the amount withdrawn. The contribution limit for TFSAs changes annually, and unused contribution room can be carried forward from year to year.
On the other hand, a Registered Retirement Savings Plan (RRSP) is designed specifically for retirement savings. Contributions made to an RRSP are tax-deductible, which means you can deduct the amount contributed from your taxable income. Any investment gains inside an RRSP are also tax-deferred, meaning they are not taxed until withdrawn. However, any withdrawals from an RRSP are considered taxable income.
So, which option is better for you? The answer depends on your financial goals, tax bracket, and future plans.
For individuals in a lower tax bracket, a TFSA may be more advantageous. Since TFSA withdrawals are tax-free, they provide flexibility and convenience for shorter-term savings goals, such as saving for a down payment on a house or funding a dream vacation. Moreover, TFSAs are an excellent vehicle for emergency funds, as they offer easy access to money without incurring taxes or penalties.
However, for higher-income earners, an RRSP offers significant tax benefits. Since RRSP contributions are tax-deductible, contributing to an RRSP can lower your taxable income, resulting in immediate tax savings. Additionally, if you expect to be in a lower tax bracket during retirement, withdrawing funds from your RRSP then could further reduce your overall tax liability.
It’s important to note that TFSAs and RRSPs have contribution limits. As of 2021, the annual contribution limit for TFSAs is $6,000, while RRSPs allow contributions up to 18% of your previous year’s earned income, up to a maximum of $27,830. Exceeding these limits can result in penalties or tax implications.
For some individuals, utilizing both TFSAs and RRSPs is the ideal approach. This strategy allows you to take advantage of the benefits of each account. Maximizing your TFSA contributions can be a great way to save for upcoming expenses, while simultaneously contributing to an RRSP can help you secure a comfortable retirement.
In conclusion, TFSAs and RRSPs both offer valuable advantages to help Canadians achieve their financial goals. When deciding between the two, consider your current tax situation, investment objectives, and long-term plans. Consulting with a financial advisor can ensure you make an informed decision that aligns with your individual circumstances.
This is of course if GIS will still be going by the time you retire
Thank you
I still don’t get it, I’m even more confused
This is why Satoshi emphasized the importance of a trustless money system… They can close that loophole at any time. Whenever you put your money into a retirement instrument that is government approved you are trusting that nobody’s ever going to move the goalposts at any point along the road to retirement.
This is all assuming we wont be taken over by robots or enslaved by tyrants by 2045
the loop hole in a tfsa is when you make profits on the money contributed in a tfsa, the profits are tax free.
From the video they are not saying the fact that is tax free is the loophole, the loophole is that it doesn't count as income hence qualifying you for the income supplement under certain conditions. Seems to be a hard one to plan around due to the time frame.
This video makes a mistake at 1:28. He's talking about RRSPs and how much money she's left with, per year, in retirement after she pays back the taxes. The screen shows the sum of $29,000 with TFSA above it. It should have said RRSP above the $29,000. Make you wonder if they know what they'rre talking about when they miss such a glaring mistake.
This method is useless for retirement
Here is a better way to save money. End CBC funding (1.5 Billion) and use that to lower income taxes.
Until you socialist cucks terminate it, no one can bet and win on our government in 25 years.
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Or you can max out your full RRSP contribution room and stuff the tax return into a TFSA. $5500/year is not a lot of money and these loopholes will probably be clawed back by the time most of us are 65 anyways… Basically, don't count on the government to fund your retirement. Save all you can and invest wisely.
What about if you earn higher income now. At $100,000 or more you really need that tax deduction. My opinion is that if you make 60k or less, tfsa first. 60k or more and RSP is more important.
Amazing Video. Explained so well. Thank you.
There is no loop hole in TFSA. It is the feature that is why it's called Tax Free Saving Account. It is Tax free its feature, not loop hole.
You're screwed either way because the loopholes will be closed and the conditions will change….. A lot can happen in 30 years.
Hardly Conservative and the future value formula for annual compounding is: FV = P * (1+i)^n
RRSP: FV = $350,000, n = 30 years, P = $7,200/yr; therefore, i = 13.8%
TFSA: FV = $250,000, n = 30 years, P = $5,500/yr; therefore, i = 13.6%
Where on God's Green Earth will this woman get an annual compound "conservative investment" interest rate of 13.6 to 13.8% per year consistently for 30 years?
Even at 40 years, the interest rate would have to be between 10 to 10.2%.
After the above, I will not even start with the $20,000/year payout over 25 years (Hint: learn to do an annuity table).
Have a care with the 1st Semester Finance Math CBC.