As a newcomer in Canada, you may have this question about TFSA vs RRSP and what should be the first to start with, etc.
I would like to give some easy pointers.
RRSP gives you immediate tax savings vs TFSA gives you retirement tax savings ( According to me I want to save more tax at retirement so I will first start TFSA investment)
RRSP contribution is based on your income. TFSA limit is fixed by the Govt of Canada which is $6000 Per year at the moment.
|When did the federal government establish the account?||2009||1957|
|What are the age restrictions?||Anyone 18+ can open an account.||Anyone up to age 71,1 with earned income and a filed tax return can open an account.|
|What are the annual contribution limits?||Currently 6,000. Limits change periodically.||18% of your income, up to a maximum of $29,210.3|
|Can you carry unused contribution room forward?||Yes||Yes|
|What are the penalties for over contributing?||Penalty tax of 1% per month on the excess funds.||Penalty tax of 1% per month on the excess funds.|
|What are the tax advantages?||Your money grows tax-free; you pay no tax on withdrawals.||Your money grows tax-sheltered, with taxes deferred. Contributions are tax deductible and can be deferred for a future tax break.|
|What are the tax disadvantages?||Contributions are not tax deductible.||You must pay tax on withdrawals.|
|What are the withdrawal rules?||Tax-free, at any time and for any purpose (subject to any specific investment terms).||At any time and for any purpose. Withdrawals are taxed as income unless used for your first home or continued education. You must convert the funds to a RRIF or annuity by age 711 and pay tax on income you withdraw.|
|Can withdrawals be redeposited?||Yes; after a withdrawal, contribution room is adjusted and readded in the next year.||No, unless related to the Lifelong Learning Plan or Home Buyers’ Plan.|
|Can you name a beneficiary?||Yes||Yes|
|Can you benefit by contributing to your spouse’s account?||No. TFSA accounts belong to individuals.||Yes. You can contribute in your spouse’s name and enjoy a tax benefit.|
If your income or family income ll be a in higher tax bracket it makes sense to start contributing in RRSP. As a newco,mer if you are thinking you will not be a in higher tax bracket for any reason you can think of investing in TFSA rather than RRSP.
Carried forward RRSP can be used when you sell assets or you have a higher income.
let’s say you earn $50,000/year and have $50,000 in unused contributions (you haven’t contributed in a while). you inherit $100,000 or got some asset to sell money for $100000.In this case, if you contribute $50,000 (your maximum room) to your RRSP, you’ll be able to reduce your taxable income considerably.
Another aspect for example RRSP Investment is grown around $250K and your TFSA investment has also grown by $250K in 30 years. When you sell TFSA investment you pay 0 Tax. And if you sell your RRSP investment you’ll have to pay tax on the amount you are withdrawing.
Another thing say for example you need some money and you want to withdraw from TFSA/RRSP account. If your TFSA & RRSP money is not positive ( you are making a loss in your investment) I would recommend you withdraw money from your RRSP, not TFSA, TFSA loses its purpose if you don’t save tax on it, So withdraw it when you can make the best use of it.
So as a newcomer if you understand investment vehicles wisely you can use them for maximizing your tax benefits.
These are my personal suggestions, More I learn more I’ll update you all on this.