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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
  RRSP TFSA
Annual contribution limit 18% of your income from previous year, up to a maximum of $24,930 for 2015 ($25,370 for 2016) 2009-2012: $5,000
2013-2014: $5,500
2015: $10,000
2016: $5,500
Contributions Tax deductible Not tax deductible
Growth Tax deferred Tax free
Withdrawals Taxable: may affect your government benefits such as Old Age Security Tax free: do not affect your government benefits
Withdrawal amounts Contribution room is lost for the amounts you withdraw Added to future contribution room
Unused contribution room Carried forward Carried forward
Spousal plan You can contribute to a spousal RRSP No spousal plans. You can, however, give money to your spouse for his or her TFSA.
Plan termination End of calendar year that you turn 71 years old. Assets are transferred to a registered retirement income fund (RRIF) or annuity. No age limit for contributions
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.

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