RRSPs and TFSAs both offer tax-saving benefits and opportunities for your money to grow. However, there are a few key differences between them. For example, contributions to an RRSP are tax deductible while TFSA contributions are not. Thus, for some people, an RRSP may be ideal while for others TFSAs may make more sense. Here are a few situations where it would be better to invest in TFSAs.
When you have a low income
For people with an annual income lower than $35,000, RRSPs will not offer very rich tax benefits. If your annual income is less than $10,000 you will not benefit from tax deductions and thus TFSAs are a better option.
When you expect to fall into a higher tax bracket in retirement
For most people, their retirement income is lower than the income they received while they were working. However, in some cases, the reverse may happen. For example, you may have very low taxable income. Then, over the years, your income may rise and your investments may grow making your retirement income substantial. Thus, in this scenario, if you contribute to a TFSA, in retirement you would be taxed at a much lower rate than if you needed to withdraw money from your RRSP account.
When there are chances you may need to dip into the account before retirement
Generally, money withdrawn from your RRSP is taxable. However, withdrawals from TFSAs are not taxable. Thus, if you had to dip into TFSA-based savings for your child’s education or for an emergency, it wouldn’t affect your taxes. In this way, TFSAs are more flexible than RRSPs. If you are dealing with an ongoing crisis or are in a precarious situation, then it may be best to store your funds in a liquid TFSA account.
When you already have a large RRSP
Having too much money in your RRSP is not as ideal as it sounds. If you invested in stocks and bonds that did well and sold them at the right time, you could make a pretty profit. However, you will eventually need to pay taxes on the accumulated money, once you start to make income withdrawals. Thus, if you already have a large RRSP account, seek to maximize your TFSA, in addition to your RRSP.
To sum it up, the choice between RRSP vs TFSA depends on many factors, but it is not an either or choice, these two accounts can work in concert to help you achieve your financial goals. For further guidance, speak with an financial advisor.
This post contains sponsored links from Sun Life Financial.