RRSP? TFSA? RESP?

Solutions Magazine: Winter Edition 2010

Until 2009, most Canadians held their retirement savings in an RRSP, where they could claim a deduction for their contributions and then defer tax on withdrawals until retirement.The introduction of TFSAs has provided another powerful savings vehicle that allows investment growth to accumulate and be withdrawn at any time tax- free. Unlike an RRSP, you cannot claim a tax deduction for the contributions you make to a TFSA. On the plus side, if you need to withdraw money from your TFSA, you have an opportunity to replace that money because all TFSA withdrawals are added back to your unused contribution room in the following year.

If you have children or grandchildren, RESPs are another popular option.The subscriber (or contributor) makes contributions on behalf of a beneficiary (the child). The contributions are not deductible or taxable on withdrawal.The growth is tax-deferred until withdrawal, at which time it can be taxed in the beneficiary’s hands if he or she enrolls in a qualifying educational program. Contributions to a child’s RESP qualify for the Canada Education Savings Grant (CESG)1 and, if your family’s income is below certain thresholds, you may also qualify for the Canada Learning Bond (CLB).

THE RETIREMENT DILEMMA
If you are saving for retirement, then you may be torn between an RRSP and a TFSA. Ideally, you would maximize contributions to both, but if that’s not an option here are some thoughts to consider.

Whether the best choice is to save in an RRSP or a TFSA depends on your savings needs, as well as your current and expected future financial situation and income level.

Generally, an RRSP is used for saving for retirement, while a TFSA can be used for both saving for retirement and other shorter- term purchases. Because TFSA withdrawals are added back to your available TFSA contribution room in the following year, there is very little downside to using your TFSA savings for mid-sized to large purchases.

If you are in a low tax bracket, saving in a TFSA may be more advantageous than saving in an RRSP since TFSA withdrawals have no impact on federal income-tested benefits and credits such as child tax benefits and Old Age Security. On the other hand, RRSPs may be a better option if your tax rate at the time you contribute is higher than it will be when you withdraw your savings.You’ll benefit from a tax deduction when you make your contribution and withdrawals will be taxed at your lower future rate. If the reverse is true, a TFSA can provide better results.

EDUCATION SAVINGS CHOICES

If you are saving for your child’s education, then you are probably weighing the pros and cons of an RESP or a TFSA. For children under age 18, RESPs are the preferred savings vehicle because of the CESG. For children over age 18, the CESG no longer applies so you may want to help them start their own TFSAs. If you want to maintain control over the funds, then you could save for their education in your own TFSA instead.

Solutions Magazine: Winter Edition 2010