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Oaken Update – February, 2014

RSP or TFSA? Both can play a role in retirement

We all know that RSPs are the long-established favourite retirement vehicle for Canadians. But their younger cousin TFSAs are gaining popularity too. Each has its own strengths, and with the 2013 RSP deadline coming up on March 3, now is a good time to look at both.

 


 

RSP: Lower taxes today, greater returns tomorrow

For many individuals, RSPs provide tax relief. That’s because every dollar you contribute reduces the income on which you have to pay tax—and that can translate into a nice rebate! Use that money to invest even more and you’re one step closer to a comfortable retirement.

Of course you ultimately have to pay tax when you start withdrawing from your RSP. But for most retired people that is at a lower bracket than when they were working—and even if it doesn’t, you’ll still benefit from the tax-free growth of your portfolio.

RSPs are especially good for those in higher tax brackets. They’re also great for couples (married or common law) where one spouse earns more than the other: a spousal RSP lets you split income in a way that can reduce your joint tax burden. With all these advantages, there’s clearly a lot to like about RSPs.

 


 

TFSA: Tax-free growth…forever!

TFSAs won’t give you tax relief today, but they will give you relief tomorrow. That’s because whatever growth you earn in a TFSA remains untaxed—even if you withdraw it for your retirement. And that makes TFSAs a must-have for all investors.

TFSAs also have another advantage: you can withdraw money from them at any time with no penalty, and then re-contribute the same amount in the next calendar year. So that means a TFSA can be used for anything from emergency funds to home renovations, in addition to building up your retirement nest egg. How’s that for flexibility?

 


 

RSP or TFSA?

Ideally, you’d like to maximize your contributions to both an RSP and a TFSA. But if you don’t have enough money to do so, which one should you choose? As a rule of thumb, it’s usually best to contribute to your RSP if your income today is greater than it will be when you retire—and top up your TFSA if the opposite is true. Unless of course, you’re over the age of 71, you can only contribute to your TFSA as you no longer will have an RSP.

Whichever one you choose, remember that deposits in Oaken RSPs and TFSAs are eligible for Canada Deposit Insurance Corporation (CDIC) coverage, up to applicable limits.

And don’t forget that March 3rd is the deadline for RSPs. For TFSAs, you can contribute at any time of the year, with an annual limit of $5,500

 


 

For more on TFSAs and RSPs, we recommend the articles below:

TFSA:Our number-one tax shelter, Jonathan Chevereau covers the ins and outs of TFSAs.

Three common RSP mistakes you’ll want to avoid: Advice on complex RSP issues that most people don’t know about.

RSP bashers: Here’s how the math really works. Understanding the amount of tax you pay on RSP withdrawals.

The information, materials and opinions contained in this Blog are provided for your information only. This Blog does not constitute legal, financial or other professional advice and you should not rely on it as an alternative to specific advice based on your particular circumstance.

This blog contains links to third party websites. These links are provided for information and convenience; Oaken does not endorse the content of any third party website, and it makes no representation or warranty as to the information on such third party sites. By clicking on any link to a third party site, you leave Oaken’s website and do so at your own risk.

Oaken disclaims all liability for any damage or loss that results from your access to or reliance on information contained in this Blog or any third party site.

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