Registered Retirement Savings Plan / Tax-Free Savings Account
TAX-FREE SAVINGS ACCOUNT (TFSA)
• Allows all of your investments to grow tax-free throughout their lifetime.
• Any Canadian resident age 18 or older with a Social Insurance Number can open a TFSA
• 2009 – 2012 annual contribution limit: $5,000
• 2013 – 2015 annual contribution limit: $5,500
• Annual limit will increase with inflation in future years, in $500 increments.
• You can carry forward unused contribution room indefinitely.
• The Canada Revenue Agency will track your contribution room and report this amount through the “My Account” function on the CRA web site.
• There is no tax deduction for contributing.
• The returns your investments generate (interest, dividends or capital gains) are completely tax free.
• The No-Fee Tradex TFSA allows members to invest in any of the three Tradex Mutual Fund options, or our Tradex Investment Savings account.
REGISTERED RETIREMENT SAVINGS PLAN (RRSP)
• Allows you to save for the future on a tax-deferred basis. You can contribute to your RRSP until December 31 of the year in which you reach age 71.
• Your allowable RRSP contribution for the current year is the lower of:
(1) 18% of your earned income (salary, wages, rental income, alimony etc.) from the previous year; or
(2) the maximum annual contribution limit for the taxation year.
• Click here for RRSP limits table from Canada Revenue Agency.
• The Canada Revenue Agency will notify you of your current RRSP limit after they process your previous year’s tax return.
• Your contributions are tax deductible.
• The income earned in your RRSP is not taxed until it is withdrawn, typically at a much lower rate during your retirement years.
• You can open various types of plans through Tradex; including self-directed RRSP’s and Tradex will cover the annual administration fee.
TFSA or RRSP?
The chart below illustrates the after tax return of $36,500 of income earned by an individual who invests in either a RRSP or TFSA for a 25 year period, assuming a 5% rate of return. This example depicts the result of taxation at the same rate, at a lower rate, and at a higher rate during an individual’s retirement years versus their working years.
All things being equal, with the same compound return, the same time frame and a constant tax rate before and during retirement, the amount of cash after tax in the RRSP and TFSA is identical and no preference should be given to one over the other.
In the event your retirement income tax rate will be lower, the RRSP option would be preferable.
If your retirement income tax rate will be higher than your current tax rate, the TFSA wins out.
Still not sure which option is best for you? Please contact a Tradex advisor to discuss in greater details which options are best for your individual needs and specific situation.