With 2015 here, Canadian residents now have the opportunity to deposit an additional $5,500 in a Tax Free Savings Account (TFSA).
With the TFSA available for saving in a tax-free environment, does it still make sense to contribute to an RRSP?
RRSP’s can work well for contributions in a high tax bracket and withdraw in a lower tax bracket. A TFSA can provide a higher return if the reverse occurs.
Low income
A TFSA can be an ideal savings vehicle for low income tax brackets. RRSP’s may not be well suited to low income Canadians. The RRSP tax savings are insignificant and may be in a higher tax bracket when withdrawals are made. It should also be considered that TFSA withdrawals do not impact income tested benefits and credits, such as child tax benefits and credits, Old Age Security (OAS) or Guaranteed Income Supplement.
When in a lower tax bracket, such as maternity leave, and have made RRSP contributions in the past, it may make sense to consider withdrawing from a RRSP to make a TFSA contribution. However, remember that funds withdrawn from a RRSP cannot be re-contributed at a later date.
Middle income
One strategy would be to contribute to the TFSA now and accumulate RRSP room to be used later when in a higher tax bracket to optimize the tax benefits.
High income
This is a situation where both the RRSP and TFSA contributions can be maximized. In fact, the tax savings or refund received from a RRSP contribution could be used to fund the TFSA.
Submitted by Ecclestone Financial Group Inc., 245 St. David St. N., Fergus.
