Saving for retirement – RRSPs and TFSAs

On average, Canadians are living longer than ever. A 65-year-old male now has a life expectancy of age 84, and a female, 87. These numbers point to longer retirements for many Canadians.

That’s great news. You will have more time to spend with family and friends, and to pursue your interests. A longer retirement, however, presents an interesting planning challenge: saving enough to generate a sustainable income during your retirement years.

RRSPs and TFSAs

Registered retirement savings plans (RRSPs) are among the most popular investment plans in Canada. With the dual benefits of tax deductions and tax-deferred growth, it’s easy to see why Canadians choose RRSPs as their primary vehicle to save for retirement.

Introduced in 2009, TFSAs are a newer plan type that offer tax-free growth and significant flexibility. As TFSAs mature and contribution room grows, people are beginning to see the long-term benefits of incorporating TFSAs into their investment plan as soon as possible.

RRSPs and TFSAs at a glance

Which option is best

There are certain guidelines that you can follow to decide whether to contribute to an RRSP or a TFSA. Please keep in mind that these are not guaranteed to apply to you and that the best approach is to consult with your financial advisor in order to decide which option is most appropriate. Your financial advisor can also help you estimate how much money you’ll need in retirement, and what savings and investment strategies will help you generate the necessary income.

RRSPs may be better when you:

• Expect to have a lower income in retirement
• Earn a significant income

TFSAs may be the better option when you:

• Expect to be in a higher tax bracket in retirement (for example, if you know you will have a significant pension)
• Earn a relatively lower income (because RRSP/RRIF withdrawals may trigger a clawing back of certain government benefits)
• Plan on withdrawing money before you retire

Conclusion

Whether you invest in an RRSP or a TFSA usually depends on your current and future financial situation, and your long-term goals. Consult with your financial advisor to determine which option is best for you.

The contents of this piece are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.