When is it best to use a tax free savings account (TFSA) over an RRSP?

You may already use an RRSP to invest for the future, but did you know there’s another option – the Tax-Free Savings Account, or TFSA? It’s a great complement to your RRSP, but the challenge is deciding when it’s best to choose a TFSA over an RRSP. Here are some general guidelines:

If you want easy and frequent access to your money, use a TFSA. You’ll be able to withdraw funds tax-free at any time and re-contribute the same amount in the future. Keep your RRSP for long-term retirement savings.

If you earn a low income you may benefit more from the tax-free growth and withdrawal flexibility of a TFSA than from the modest tax deduction of an RRSP.

If you are starting your career, then invest in a TFSA before an RRSP. Over the years you’ll accumulate RRSP contribution room that you can eventually take advantage of when your income is higher and when claiming the RRSP tax deduction has a bigger impact.

If you need to borrow money, a TFSA can be used as loan collateral. Just remember, the interest on money borrowed to invest in a TFSA is not tax deductible.

If you are saving for a house or education, a TFSA may be a better option than the RRSP’s Home Buyers Plan or Life Long Learning Plan. That’s because TFSA withdrawals don’t have to be paid back, money doesn’t have to be kept in the account for 90 days before withdrawing, and if you decide to use your money for another purpose, you don’t have to pay tax.

If you have interest-bearing investments, like GICs, money market mutual funds, term deposits, or bonds, which are taxed at higher rates, put them in a TFSA where they are tax sheltered.

If you own high risk/high return investments a TFSA might be better than an RRSP or non-registered account. If your $5K grows to $50K it could be withdrawn tax-free. The downside — you can’t claim a capital loss if your investments lose value.

If you hold investments in a non-registered account, consider transferring them ‘in-kind’ to your TFSA so they can grow tax-free. But talk to an expert first because there may be tax consequences.

If you have a pension plan at work and therefore have limited opportunities to contribute to an RRSP, use a TFSA to augment your retirement savings.

If you are making the maximum amount of RRSP contributions, put additional savings in a TFSA before a non-registered plan so your money can grow tax-free.

If you are retiring in 10-20 years, use a TFSA to complement your RRSP and grow your nest egg more aggressively.

If you need to reduce taxable income in retirement, use a TFSA in addition to your RRSP. After you convert your RRSP into a RRIF at age 71, RRIF withdrawals are taxed, and the more money you withdraw, the higher your marginal tax rate. But by also withdrawing tax-free funds from a TFSA you can reduce your RRIF withdrawals, potentially lowering the overall tax you pay.

If you don’t need all your RRIF/LIF withdrawal cash, move it to a TFSA where it can grow tax-free until you need them later.

If you are receiving Old Age Security, the Canada Child Tax Benefit, EI or the GIS, invest in a TFSA to avoid potential clawbacks. TFSA interest earned or withdrawals aren’t considered income so won’t affect your benefits.

These are all only generalizations. Your situation is unique. If you want to find out how to use the Tax-Free Savings Accounts to your advantage, drop by the investment area of our branches or the Credential Financial Strategies Office located beside the Russell branch of Fusion and talk to one of our Credential Asset Management Inc. Mutual Funds Investment Specialists or Credential Financial Strategies Inc. Representatives. They can provide you with an expert’s perspective and help you invest in the future with your own Tax-Free Savings Account.

To connect with one of our Wealth Management Specialists, click here.

Mutual funds are offered through Credential Asset Management Inc. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters.

Credential Financial Strategies Inc. is a member company under Aviso Wealth Inc., offering financial planning, life insurance and investments to members of credit unions and their communities. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters.