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.
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.
| RRSP | TFSA | |
|---|---|---|
| Annual contribution limit | 18% of your income from previous year, up to a maximum of $25,370 for 2016 ($26,010 for 2017) |
2009-2012: $5,000 2013-2014: $5,500 2015: $10,000 2016-2017: $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 |
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.
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.
