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    RRSP vs. TFSA: How should you save for retirement?

    If you’re in your 30s, 40s, or even early 50s, now is the time to jump start your retirement savings. With a significant time horizon until retirement, you can let the power of compounding go to work for you.

    Taxes are another thing you want working for you, because they can take a big bite out of your investment earnings. When saving for retirement, take advantage of registered investment accounts and their special tax features to help you save more, faster.

    The two types of registered accounts you can use to save for retirement are the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA).

    How does an RRSP work?

    An RRSP is specifically designed with retirement as the end goal. One of the most popular features is that contributions made to the plan are tax-deductible (in the year they are made or in a subsequent year) and are therefore made with what can be considered pre-tax dollars. Your savings grow tax-free for as long as your money stays in the plan. However, withdrawals from the plan are taxable and the plan must be collapsed at the end of the year you turn 71.There is no minimum age to open an RRSP.).

    You must have “earned income” in order to contribute to an RRSP. This is income from active sources like a business or employment. There is an annual contribution limit, but it’s cumulative, so if you don’t contribute this year, you can always catch up next year. Finally, an RRSP can hold many different types of investments from stocks to bonds, GICs to exchange-traded funds.

    How does a TFSA work?

    A TFSA can be used to save for any financial goal, including retirement. One of the biggest differences compared to an RRSP is that contributions are not tax deductible. But when you take money out, it’s not taxable and you can re-contribute in the following year, in addition to the annual maximum. Just like the RRSP, your savings grow tax-free for as long as your money stays in the plan.

    You have to be 18 years old to open a TFSA but there is no age limit for making contributions. There is an annual contribution limit, which is currently $6,000 per year (indexed for inflation.) Contribution room is cumulative. Like an RRSP, a TFSA can hold a wide range of investments.

    How do I know which one(s) to use?

    You can use either an RRSP, a TFSA or both, as well as non-registered investment accounts. Non-registered accounts do not have special tax status, so you probably want to make the maximum contributions to your RRSP and TFSA first. As mentioned above, the timing of taxes is the biggest difference between an RRSP and a TFSA. If you think your marginal tax rate in retirement will be lower than it is today, an RRSP is a good choice because taxes are deferred until the money is withdrawn and you get a tax deduction today. On the other hand, if you think your marginal tax rate in retirement will be higher than it is today, a TFSA may be the better choice because withdrawals are not taxable.

    To help make the best choice for you, consult a financial advisor at Kawartha Credit Union who will give you tailored advice for your financial situation.

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