Tips and Traps for RRSPs and TFSAs

1. RRSP contributions made within a year offer immediate tax benefits, as they will reduce your taxable income by the amount of the contributions for that specific year. By maximizing your RRSP contributions, you can benefit from larger tax deductions, especially if you are in a higher tax bracket, but contribution limits do apply.
2. Many employers offer RRSP contribution matching up to a certain limit. You can take advantage of this to earn additional money by contributing the amount required to maximize your employer’s matching contribution.
3. Consider the year you plan to retire and the anticipated marginal tax rate during your retirement. If you anticipate a low tax rate when you retire and withdraw funds, a RRSP could benefit you. However, if you anticipate being in a higher tax rate, the benefits of a RRSP are reduced.
4. RRSPs offer a Home Buyer Plan (HBP) and a Life-Long Plan (LLP). If you are looking to purchase your first home, the HBP gives you access to $35,000 of your RRSP, tax and interest free to put towards your first home. If you plan on going back to school, the LLP will give you up to $10,000 a year to a maximum of $20,000 from your RRSP to put towards schooling. Both HBP and LLP amounts will need to be re-paid into your RRSP over time to avoid an income inclusion of the amounts withdrawn.

TFSAs are ideal for utilizing tax-free growth.

1. Annual contributions to TFSAs can maximize potential long-term growth without the added worry about future taxes upon withdrawal.
2. TFSAs allow withdrawals without penalties at any point in time, making them suitable for short term and long-term saving goals. This makes it easier to withdraw emergency funds or access your investment funds before retirement.
3. TFSAs are very diverse. You can have several types of investments such as stocks, bonds, mutual funds, and GICs, and can diversify your investment to maximize growth in a tax-free environment.

1. Both RRSPs and TFSAs have annual contribution limits where overcontributing can result in significant penalties. It is important to monitor your contributions closely to stay within the limits.
2. If you are a Canadian tax resident but a US citizen, you should speak to your Crowe Soberman advisor before investing in a TFSA or RRSP, as some of the benefits of a TFSA and RRSP in Canada are not available in the US.
3. Non-residents cannot contribute to a TFSA. Significant penalties will arise if you are a non-resident and contribute to a TFSA.
4. Capital gains are taxed at favorable rates in Canada. If you expect to incur significant capital gains in your RRSP, you may lose the ability to access these favorable tax rates, as withdrawals from a RRSP are taxed at normal income tax rates.

Determining the best option for you based on what your goals are is crucial for effective financial planning. If you find yourself with unanswered questions or seeking personalized guidance, Crowe Soberman’s team of professionals can help provide tailored advice to help you make informed decisions to optimize your financial situation.   

This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.