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TFSA vs RRSP – What you need to know to make the most of them in 2021

February 21, 2021/in 2021, Blog, rrsp, Tax Free Savings Account /by Fransen Financial Inc.

If you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can provide significant tax savings. To help you understand the differences, we compare:

  1. TFSA versus RRSP – Differences in deposits

  2. TFSA versus RRSP – Differences in withdrawals

1) TFSA versus RRSP – Difference in deposits

There are several areas to focus on when comparing differences in deposits for 2021:

● Contribution Room

● Carry Forward

● Contribution and Tax Deductibility

● Tax Treatment of Growth

How much contribution room do I have?

If you have never contributed to a TFSA before, you can contribute up to $75,500 today. This table outlines the contribution amount you are allowed each year since TFSAs were created, including this year:

For RRSPs, the deduction limit is always 18% of your previous year’s pre-tax earnings to a maximum of $27,830. For example, if you earned $60,000 in 2020 then your deduction limit for 2021 would be $10,800 (18% x $60,000). If you earned $200,000, your deduction limit would be capped at the maximum of $27,830.

How much contribution room can I carry forward?

If you choose not to contribute to your TFSA at all one year or do not contribute the maximum amount in a year, you can indefinitely carry forward your unused contribution room. The only restrictions on this are that you must be a Canadian resident, older than 18, and have a valid social insurance number. If you make a withdrawal, then the amount you withdrew is added on top of your annual contribution room for the next calendar year.

For an RRSP, you can carry forward your unused contribution room until the age of 71. When you turn 71, you must convert your RRSP into an RRIF. If you make a withdrawal from your RRSP, you do not open up any additional contribution room.

Contributions and Tax Deductibility

Your TFSA contributions are not tax-deductible and are made with after-tax dollars.

Your RRSP contributions are tax-deductible and made with pre-tax dollars.

Tax Treatment of Growth

One of the reasons it’s essential to make both RRSP and TFSA contributions is that any growth in them is treated differently.

A TFSA is more suitable for short-term objectives like saving for a house down payment or a vacation – because all of the growth in it is tax-free. When you make a withdrawal from your TFSA, you won’t have to pay income tax on the amount withdrawn.

The growth in an RRSP is tax-deferred. This means you won’t pay any taxes on your RRSP gains until age 71, at which time, you convert RRSP into a RRIF and begin withdrawing money. RRSPs are better suited for long-term objectives, like retirement. Since you will have a lower income in retirement than when you are working, you will be in a lower tax bracket and, thus, not pay as much tax on your RRIF income.

TFSA versus RRSP – Differences in withdrawals

There are several areas to focus on when comparing differences in withdrawal for 2021:

  • Conversion Requirements

  • Tax Treatment

  • Government Benefits

  • Contribution Room

Conversion Requirements

For a TFSA, there are never any conversion requirements as there is no maximum age for a TFSA.

For an RRSP, you must convert it to a Registered Retirement Income Fund (RRIF) if you turn 71 by December 31st of 2021.

Tax Treatment of withdrawals

One of the most attractive things about a TFSA is that all your withdrawals are tax-free! This is why they are recommended for short-term goals; you don’t have to worry about taxes when you take money out to pay for a house or a dream vacation.

With an RRSP, if you make a withdrawal, it will be taxed as income except in two cases:

  • The Home Buyers Plan lets you withdraw up to $35,000 tax-free, but you must pay it back within fifteen years.

  • The Lifelong Learning Plan lets you withdraw up to $20,000 ($10,000 maximum per year) tax-free, but you must pay it back within ten years.

How will my government benefits be impacted?

If you are making a withdrawal from your TFSA or RRSP, it’s essential to know how that will affect any benefits you receive from the government.

Since TFSA withdrawals are not considered taxable income, they will not impact your eligibility for income-tested government benefits.

RRSP withdrawals are considered taxable income and can affect the following:

  • Income-tested tax credits such as Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit, and the Age Credit.

  • Government benefits including Old Age Security, Guaranteed Income Supplement and Employment Insurance.

How will a withdrawal impact my contribution room?

If you make a withdrawal from your TFSA, then the amount you withdrew will be added on top of your annual contribution room for the next calendar year. If you make a withdrawal from your RRSP, you do not open up any additional contribution room.

The Takeaway

RRSPs and TFSAs can both be great savings vehicles. However, there are significant differences between them which can affect your finances. If you need help navigating these differences, please do not hesitate to contact us. We’re here to help.

https://fransenfinancial.com/wp-content/uploads/2021/02/TFSA_vs_RRSP_2021_Featured_Image.png 281 500 Fransen Financial Inc. https://fransenfinancial.com/wp-content/uploads/2020/07/Fransen-Financial-Inc.png Fransen Financial Inc.2021-02-21 15:47:172021-02-22 15:47:18TFSA vs RRSP – What you need to know to make the most of them in 2021

2021 Financial Calendar

January 5, 2021/in 2021, Blog, personal finances, rdsp, Registered Education Savings Plan, retirement, rrsp, tax, Tax Free Savings Account /by Fransen Financial Inc.

We’ve put together a financial calendar for 2021. It contains all the dates you need to know to make the most of your government benefits and investment options. Whether you want to bookmark this or print it out and post it somewhere prominent, you’ll have everything you need to know in one place!

We’ve provided information on:

  • The dates when the government distributes payments for the Canada Child Benefit, the Canada Pension Plan (CPP) and Old Age Security (OAS).

  • When GST/HST credit payments are issued – usually on the fifth day of January, April, July and October.

  • All the dates the Bank of Canada makes an interest rate announcement. A change in this interest rate (up or down) can impact a bank’s prime interest rates. This can then affect anything from the interest rate charged on your mortgage and line of credit to how much the Canadian dollar is worth against other currencies.

  • When you can start contributing to your Tax Free Savings Account (TFSA) for 2021, the contribution limit for 2021 is $6,000.

  • March 1st is the last day for your 2020 Registered Retirement Savings Plan (RRSP).

  • December 31st , 2021 is the last day for 2021 charitable contributions.

  • December 31st is the deadlines for various investment savings vehicle contributions, including your Registered Disability Savings Plan (RDSP) and Registered Education Savings Plan (RESP), as well as your RRSP if you turned 71 in 2021.

  • Tax filing deadlines for personal income tax, terminal tax returns for someone who died in 2020, self-employed individuals

Knowing all of this information here can help you keep on top of your finances if you’re expecting any government benefits. It can also make sure you don’t miss any critical tax or investment deadlines!

Tax packages will be available starting February 2021 – reach out to your accountant to get started on your taxes!

If you have any questions on how we can help with your 2021 finances, please contact us.

https://fransenfinancial.com/wp-content/uploads/2021/01/2021-FInancial-calendar-1.png 563 1000 Fransen Financial Inc. https://fransenfinancial.com/wp-content/uploads/2020/07/Fransen-Financial-Inc.png Fransen Financial Inc.2021-01-05 13:42:002021-01-05 13:54:082021 Financial Calendar

Interest, Dividends and Capital Gains- What’s the difference?

October 7, 2019/in Blog, Investment, rrsp, Tax Free Savings Account /by Fransen Financial Inc.
https://fransenfinancial.com/wp-content/uploads/2019/10/interestDividendsCapitalGainsFI.jpg 810 1440 Fransen Financial Inc. https://fransenfinancial.com/wp-content/uploads/2020/07/Fransen-Financial-Inc.png Fransen Financial Inc.2019-10-07 15:33:032019-10-08 22:33:03Interest, Dividends and Capital Gains- What’s the difference?

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Fransen Financial Inc.
Aaron Fransen, CFP®, CHS, MFA™
Certified Financial Planner® professional
Tel:  604-531-0022
Email: info@fransenfinancial.com

South Surrey, BC

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About

Many Canadians believe they do not have enough assets to seek the advice of an advisor. This is far from the truth at Fransen Financial. Numerous studies have validated the fact that professional advice works for investors of all circumstances. To secure a healthy financial future for yourself and your family at all stages of life, it’s important to address a number of major issues that will ultimately help reduce financial stress, plan appropriately for your situation and, most importantly, grow your net worth. Aaron is here to help you navigate these challenges and help you stay on track.

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