With so many different options available to us, choosing where to invest your hard earned money can be troublesome.
We all know diversity is key for a successful investment portfolio and strategy, and the same holds true for RRSP versus a TFSA; both have important functions within different investment strategies. In an ideal situation, you’ll want to utilize both within your portfolio.
When you put money into a registered or non-registered account, it’s like planting a seed to grow a tree. Income generated from investments held within a non-registered account is usually taxed every year. Gains in the value of investments held within a non-registered account are also taxable when sold. It’s like pruning the tree, slowing some of its growth.
This isn’t the case with money held within an RRSP or TFSA, and the difference can quickly add up. This characteristic of registered accounts can help your money grow faster – it’s like watering the tree. The unique tax treatment of RRSPs and TFSAs, and the benefit of compounded growth, can mean a significant difference to your investments over time. Let’s take a closer look.
Contributions to an RRSP give you an upfront tax benefit. You’ll receive a tax receipt for the contribution amount which can offset your income when filing your annual income taxes. It’s almost like paying yourself twice; you pay into your savings plan for your future and you get an immediate tax break.
Any gains in the value of the investments in an RRSP are tax deferred. You’ll only pay income tax on this money when it’s withdrawn from your RRSP at a later date. If you wait to withdraw money from your RRSP until retirement, you’ll likely pay lower taxes because your annual income may be less than when you were working.
Unlike RRSPs, TFSAs don’t give you an upfront tax benefit. TFSA contributions are made with after-tax dollars. Any increase in the value of your TFSA is tax free. You won’t pay any taxes on money you withdraw at a later date.
Want to take a look at how a TFSA or RRSP can be integrated in to your financial plan? Give us a call, or Start a Conversation below.