TFSA versus RRSP – Ashley chooses both
A couple of weeks ago our writer Ashley started investing in a TFSA (Tax-Free Savings Account). She gave up her monthly magazine addiction to be able to contribute $100 monthly towards a down payment, on top of a $2000 lump-sum deposit. Her fiancé also started his own investment plan, contributing $200 monthly on top of a $5000 lump-sum deposit to a TFSA. Both of them also contribute to RRSP, but a lesser amount. Already they have $7000 towards a down payment.
How the Tax-Free Savings Account Works
- As of January 1, 2013, Canadian residents, age 18 and older, can contribute up to $5,500 annually to a TFSA. This is an increase from the annual contribution limit of $5,000 for 2009 through 2012 and reflects indexation to inflation.
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Unused TFSA contribution room is carried forward and accumulates in future years.
- Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
- Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
- Contributions are not tax-deductible.
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
- Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
- TFSA assets can generally be transferred to a spouse or common-law partner upon death.
What are some of the differences between a TFSA and an RRSP?
- An RRSP is primarily intended for retirement savings. Tax assistance provided by a TFSA complements that provided through RRSPs.
- RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed at regular rates.
- TFSA contributions are not tax-deductible but the contributions and the investment earnings are exempt from tax upon withdrawal.
- Unlike an RRSP, which must be converted to a retirement income vehicle at age 71, a TFSA does not have any minimum withdrawal requirement.
- There is no TFSA spousal plan. Individuals can provide funds to their spouse or common-law partner to invest in their TFSA, up to the spouse’s or common-law partner’s available room, and the income earned on the contributed amount is generally not attributed back to the spouse or partner who provided the funds.