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When to TFSA vs RRSP

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You may already use a Registered Retirement Saving Plan (RRSP) to invest for the future. But did you know there's another option – the Tax-Free Savings Account, or TFSA? It's a great complement to your RRSP but the challenge is deciding when it's best to choose a TFSA over an RRSP. Here are some general guidelines.

Want easy and frequent access to your money

Use a TFSA. You'll be able to withdraw funds tax-free at any time and re-contribute the same amount in the future. Keep your RRSP for long-term retirement savings.

Earn a low income

You may benefit more from the tax-free growth and withdrawal flexibility of a TFSA than from the modest tax deduction of an RRSP.

Starting your career

Consider investing in a TFSA before an RRSP. Over the years you'll accumulate RRSP contribution room that you can eventually take advantage of when your income is higher and when claiming the RRSP tax deduction has a bigger impact.

Need to borrow money

A TFSA can be used as loan collateral. Just remember, the interest on money borrowed to invest in a TFSA is not tax deductible.

Saving for a house or education

A TFSA may be a better option than the RRSP's Home Buyers Plan or Life Long Learning Plan. That's because TFSA withdrawals don't have to be paid back, money doesn't have to be kept in the account for 90 days before withdrawing, and if you decide to use your money for another purpose, you don't have to pay tax on the interest.

Have interest-bearing investments

Other investments (such as GICs, money market mutual funds, term deposits or bonds) are taxed at higher rates. Put them in a TFSA where they are tax sheltered.

Own high risk/high return investments

A TFSA might be better than an RRSP or non-registered account. If your $5K grows to $50K it could be withdrawn tax-free. The downside — you can't claim a capital loss if your investments lose value.

Hold investments in a non-registered account

Consider transferring those investments “in-kind” to your TFSA so they can grow tax-free. But talk to an expert first because there may be tax consequences.

Have a pension plan at work

If you have limited opportunities to contribute to an RRSP, use a TFSA to increase your retirement savings.

Retiring in 10-20 years

Use a TFSA to complement your RRSP and grow your nest egg more aggressively.

Making maximum RRSP contributions

Put additional savings in a TFSA before a non-registered plan so your money can grow tax-free.

Need to reduce taxable income in retirement

Use a TFSA in addition to your RRSP. After you convert your RRSP into an RRIF at age 71, RRIF withdrawals are taxed, and more money you withdraw the higher your marginal tax rate. By also withdrawing tax-free funds from a TFSA you can reduce your RRIF withdrawals, potentially lowering the overall tax you pay.

Don't need all your RRIF/LIF withdrawal cash

Move it to a TFSA where it can grow tax-free until you need it later.

Receiving government benefits

Use a TFSA to avoid potential clawbacks on some benefits (such as Old Age Security, the Canada Child Tax Benefit, Employment Insurance or Guaranteed Income Supplement) in. TFSA interest earned or withdrawals aren't considered income and won't affect your benefits.

Get advice

These are general tips and may not apply to your unique situation. Whether you're new to investing, or a seasoned veteran, it's always a good idea to get professional advice. So speak to a financial advisor who can provide you with an expert's insight and help you make informed decisions about your investments.

The information contained in this article is provided as a general source of information and should not be considered personal tax advice or investment advice. *Mutual funds are offered through Credential Asset Management Inc. and mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.

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