Lately, one question clients are asking me is whether they should contribute to a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)? Personally, I really like the TFSA, however it doesn’t have to be an either or choice. Why not do both? If both, in what proportion should you divide your contributions? In order to make an informed decision, let’s quickly review the main features of each program. I will use bullets to illustrate the features as nothing gets people’s attention more than bullets.
TAX FREE SAVINGS ACCOUNT
- Any Canadian resident age 18 or over may open a TFSA. Contribution is not based on earned income. There is no maximum age for contribution.
- Maximum contribution is $5,000 for each year from 2009 to 2012 and must be made by December 31st of the year of contribution. For 2013, due to indexing the maximum contribution is $5,500.
- There is carry forward room for each year in which the maximum contribution was not made.
- The deposit is not tax deductible, but the funds accumulate with no income tax payable on growth.
- Withdrawals may be made at any time on an income tax free basis. Withdrawals create additional deposit room commencing in the year after withdrawal.