Tax-Free Savings Accounts (TFSAs) are the newest savings vehicle available to Canadians. How do they stack up against Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs)?
Use TFSAs to save, tax-free - “The main benefit of TFSAs over RRSPs is that withdrawals of income or capital are tax-free,” says Chartered Accountant Tina Di Vito, a Director with BMO Financial Group in Toronto. “You can deposit $5,000 a year in your TFSA, re-contribute capital withdrawn from the plan and carry forward contribution room to future years. There are no restrictions on when or how much can be withdrawn.”
Use an RRSP to obtain a tax deduction - “Contributions to RRSPs are tax deductible,” says Di Vito. “Contributions to TFSAs are not.”
Use TFSAs to help finance a new home or your education - “TFSAs can provide greater flexibility for making withdrawals to help finance a new home or your education, because they don’t have set repayment terms. Withdrawals from your RRSP under the Home Buyers’ Plan or Lifelong Learning Plan do have specific terms,” explains Di Vito.
Use TFSAs as a gift/loan - “You can gift or loan funds to a spouse or an adult family member for a TFSA contribution without attribution worries.”
If your income is low, contribute first to a TFSA - “Low-income earners who don’t need a tax deduction should contribute first to a TFSA for tax-free growth and then they can withdraw funds from the TFSA to make RRSP contributions when their income is higher,” suggests Di Vito. “If you’re making RRSP contributions, you can use the tax savings from your RRSP to make a TFSA contribution.”
During periods of reduced income, withdraw funds from your TFSA - “Individuals experiencing a temporary period of lower income, such as maternity leave or unemployment, can make TFSA withdrawals, pay no tax and protect their entitlement to employment insurance and child tax benefits,” says Di Vito. “When they return to work, they can re-contribute any amounts withdrawn from the TFSA.”
Use both TFSAs and RESPs to save for your children’s education - TFSAs potentially have more contribution room than RESPs, and there is no mandatory end-date for the plan. “Also, the entire balance in the TFSA account can revert back to the parent/contributor if the child does not go to school,” explains Di Vito. “However, if you have sufficient funds, contribute the first $2,500 to an RESP to maximize the matching grants from the government and contribute the next $5,000 to your own TFSA. Once your child turns 18, begin to contribute to your child’s TFSA.”
Talk to a Chartered Accountant - “Don’t look at TFSAs in isolation,” advises Di Vito. “A CA can help you make sure TFSAs, RRSPs and RESPs work effectively together inside your overall financial and investment plan.”Brought to you by The Institute of Chartered Accountants of Ontario.
