August 17th, 2012

One common tax question I get is this: should I put money into a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)? ¬†There is of course no easy answer, and I won’t even pretend to answer that question in a blog post. ¬†It’s best answered on an individual basis.

There are some things you just can’t make a TFSA do that an RRSP does quite nicely, and there are some problems that an RRSP can create that a TFSA will never do to you. ¬†So the best place to start is to learn the differences between the two plans. ¬†If you want some basic advice, start off here:

I’m going to say one more thing: ¬†if you think you may someday qualify for what is called the Guaranteed Income Supplement (GIS) from Old Age Security, consider investing through the TFSA. ¬†Why? ¬†Because withdrawals from your TFSA account won’t affect your Supplement. ¬†You have no idea how many seniors say to me: ¬†“I would never have invested any money in an RRSP if I’d known how it would affect my Supplement

Now, the government of Canada really,¬†really doesn’t want you to plan your retirement around the Supplement – after all, the Supplement is there to protect the lower income seniors. ¬†But if you think the Supplement is in your future, consider avoiding the RRSP and go with the TFSA.

Qualifying for even a small Supplement brings with it a whole raft of other goodies (lower cost Senior’s PharmaCare, municipal property tax rebates, provincial heating rebates in Nova Scotia, etc.) ¬†So while the government of Canada doesn’t want you to build your retirement fund around the Supplement, you might be tempted to do so anyway.

Filed under: Personal Tax by David Boese No Comments »

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