An RRSP or a TFSA? Where should you contribute your money?
With the RRSP contribution deadline imminent, do you know where to contribute your money?
Whether to contribute to an RRSP or TFSA is a decision that many taxpayers are not sure how to resolve.
We explain to our clients that an RRSP is most beneficial once you are earning an income beyond the first tax bracket (more than $46,605 in 2018). When you contribute, you will receive tax savings equal to your highest marginal tax bracket; one day when you withdraw this money you will pay tax on these funds. During retirement, actuaries suggest that the majority of Canadians will be in the lowest tax bracket or slightly above.
In other words, if you save 25% today and pay 25% down the road, there has been no net saving (that would be true of any tax bracket that you were in today if the same at retirement). But, if you earn say $90,000 today and you are in the second tax bracket of 30.5%, your $1,000 RRSP contribution will save you $305 today; if you are in the 25% bracket at retirement, and let’s assume you pay $250, then you will have netted $55 in tax savings.
The higher your tax bracket is today compared to retirement, the more beneficial the net tax savings from contributing to an RRSP.
If you are trying to determine whether an RRSP or TFSA makes more sense for your particular situation, and you are in the lowest tax bracket, a TFSA is probably a better option. Anything you contribute to a TFSA, while it is not available as a deduction, earns money on your investments within, tax free. In other words, if you invest in stock within your TFSA, and you earn a profit upon sale of that stock, you will not pay any tax on that profit if earned within your TFSA.
For everyone else, a TFSA is still an excellent choice, but it is probably best to maximize your RRSP first.
It is difficult to provide generic advice to taxpayers but the above is a good rule of thumb. We do like to recommend that clients come in to review their personal situation in order to determine how to maximize the return your contributions will earn.
You’ve worked hard for your money, choose where to put it wisely!
Come in and meet with us today!
Email Sharon@CalgarysChoiceTaxServices.com or call (403)703-7176.