Retire Early » OAS http://retireearlyguide.com retire early Fri, 09 Dec 2011 17:18:13 +0000 en hourly 1 http://wordpress.org/?v=3.2.1 For Canadian Investors, TFSA or RRSP? http://retireearlyguide.com/tfsa-or-rrsp/for-canadian-investors-tfsa-or-rrsp http://retireearlyguide.com/tfsa-or-rrsp/for-canadian-investors-tfsa-or-rrsp#comments Tue, 05 Jan 2010 15:51:32 +0000 admin http://retireearlyguide.com/?p=19 Which is right for me?

As of January 1, 2009, the Federal government is offering Canadians the opportunity to invest in a new Tax-Free Savings Account (TFSA). This new account may offer significant tax advantages to certain Canadian investors. These new accounts have some similarities with traditional RRSPs but are quite different in other respects. The decision on whether to have a TFSA, an RRSP or both will depend on each investor’s specific circumstances. The following table highlights common questions about the two accounts to help you understand them better. Please speak to your advisor for more details and guidance on which approach is right for you.  Both plans are important considerations in any early retirement plan!

Question TFSA RRSP
Are there minimum age limitations for having the account? Yes. To open a TFSA you must be 18 years of age or older, a Canadian resident and have a valid SIN. No. As long as qualified income was earned in the previous year and a Social Insurance Number is available to register the plan, there is no minimum age restriction.
Are there maximum age limitations for having the account? No. Provided you are a Canadian resident with a valid SIN, you can own and contribute to a TFSA. Yes. You cannot own an RRSP beyond the end of the year in which you turn 71.
Is there a tax deduction for contributions? No. Yes.
Will the income earned in the account be taxed? No. Income earned in the TFSA is tax-free. No. As long as the earned income remains in the account there are no tax implications until withdrawal.
How much can be contributed to the account annually? Maximum annual contributions are $5,000 per year per investor. This limit will be inflation-adjusted upwards after 2009. For 2009, maximum annual contributions are the lesser of 18% of earned income in 2008 or $21,000.  This is scheduled to rise to $22,000 in 2010 and will be inflation adjusted beginning in 2011.
Can unused contribution room be ‘carried forward’? Yes. If you only contributed $2,000 this year, you could contribute $8,000 next year ($5,000 + $3,000 unused). Yes, unused room can be carried forward indefinitely.
If funds are withdrawn, will more contribution room be created? Yes. Withdrawals will create new room. If you withdrew $4,000 this year you could contribute $9,000 next year ($5,000 + $4,000). No. Withdrawals do not create additional contribution room.
How are withdrawals taxed? Any withdrawals from the account are received tax-free. Any withdrawals from the account will be taken into income and be taxed.
Which account is better from a tax perspective? Although withdrawals are tax-free, there is no tax deduction initially. Assuming the marginal tax rate (MTR) remains constant, there is no tax advantage. If the MTR is expected to rise in the future, the TFSA could be preferable to the RRSP. Although withdrawals are taxed, there is a tax deduction provided initially. Assuming the marginal tax rate (MTR) remains constant, there is no tax advantage. If the MTR is expected to be lower in the future, the RRSP could be preferable to the TFSA.
Will withdrawals affect my Federal benefits? No. Withdrawals are not considered income for federally income-tested benefits such as Old Age Security or Employment Insurance so those benefits will not be reduced. Yes. RRSP withdrawals are considered income for Federal benefits such as OAS or Employment Insurance so those benefits may be reduced.
What are the investment options in the fund? The investment options are very broad, essentially the same as provided by an RRSP. There is a wide range of investment choices, such as Money Market, Stocks, Bonds, Mutual Funds, etc.
Can the funds be used as collateral for a loan? Yes, provided certain criteria are met. No.
Can non-residents hold the account? Yes. Yes.
Can the plan be transferred to my spouse on death? Yes, the plan can be transferred to your spouse if they are named as the sole successor. Yes, the plan can be transferred to a spouse on death with no immediate tax implications.
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