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Millions of Canadian make RRSP contributions each year for the sole purpose of getting a big tax refund cheque each spring. If this is your only reason for investing in RRSPs, there may be situations where making RRSP contribution isn't your best option.
With the arrival of the Tax-Free Savings Account (TFSA) in January 2009, Canadians now have a viable alternative to RRSPs when saving for their retirement. Simply put, the TFSA is the mirror-image to an RRSP - you don't get an upfront refund, but all your future withdrawals are 100% tax free.
When reviewing the 'pros' and 'cons' for investing in RRSPs vs TFSAs there is no single right answer because tax situations usually change for individuals during their careers.A wise financial strategy always considers the current and future tax consequences of owning different types of investments. While money inside an RRSP grows tax-free, in retirement when the RRSP is converted to a Registered Retirement Income Fund (RRIF) tax is paid on every dollar of income.
In contrast, with a TFSA, all investments compound tax-free and all income is withdrawn without incurring any income tax. This can be especially helpful to low-income seniors because TFSA withdrawals never trigger the OAS clawback.
Because there are numerous variables that need to be considered when contributing to either an RRSP or a TFSA, it is always best to consult with a financial professional to determine your best course of action.
Copyright © 2011 AdvisorNet Communications Inc. All rights reserved. This article is provided for informational purposes only and is based on the perspectives and opinions of the owners and writers only. The information provided is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of the AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission.