Grace Gamboa, Mobile Financial Advisor
Advice from Grace: RRSP versus TFSA - what’s the difference?
Have you been staring at interest rates for the past 10 years, wondering when your savings would start earning a better rate? If so, you would not be alone. This is a common concern among many savers and investors. Since the financial crisis of 2008, a pretty staggering amount of money has entered the market through what is known as ‘quantitative easing’. Most people call this “printing money”, because that is the general effect it has. What occurs is that Central Banks buy assets in rathering staggering numbers - securities, treasury bonds - from its member banks, adding massive liquidity - a lot of cash - to lend, so that interest rates go down, more businesses and people borrow, spending goes up and the economy improves. The US alone added over 4 trillion dollars to the economy through quantitative easing between 2008 and 2016. The spigot has now been turned off, and there is an expectation of increased interest rates, which will be good for savers and investors. But there is more to the value equation than the interest rate.
Optimal returns not only mean “getting the best interest rate”, the tax treatment of those returns (interest earned) is something that many investors don’t spend enough time considering. Ensuring that you are maximizing the tax advantages of both your TFSA & RRSP, is a great place to start.
What is the difference you may ask?
When you make an RRSP contribution, you get to deduct that amount from your taxable income. Some receive a refund from the government once they file their taxes, hence the rush to contribute before the deadline, which for 2019, is March 1.
The investments inside your RRSP grow free of tax while they stay in the plan. Down the road, however, when money is withdrawn directly from the RRSP it will be taxable. Typically this is done when you retire, and your tax bracket would be lower.
A TFSA (tax free savings account) offers similar tax advantages to an RRSP, but from an after-tax standpoint.
With a TFSA, you contribute after-tax dollars. In other words, you don't get a deduction for your contribution, but once your money is in the plan, it not only grows (through interest) free of tax, but also comes out free of tax! Your future self will be very happy with that.
Need more information? I would be more than happy to come to you and discuss your investment portfolio to ensure you are maximizing both your RRSP and TFSA. Call me anytime!