There is still a lot of confusion out there regarding the TFSA (Tax Free Savings Account) vs the RRSP (Registered Retirement Savings Account) and which account investors should put their money in.
The RRSP is a tax deferral strategy, meaning investors put off paying the tax on their income until a future date; usually during retirement when they are earning less money and are therefore in a lower tax bracket. RRSPs let the investments grow within the account while the investor does not pay tax on the investment income earned. Essentially money will grow three times as fast inside a registered account because of this tax sheltering affect. Investors also receive a tax deduction or refund on the amount they invest into an RRSP, making them more attractive to those in high tax brackets or those who just hate paying tax.
The TFSA is also a registered account and therefore lets investors grow their money and pay no tax on investment income earned. The main difference it the investor does not receive a tax deduction or refund upon investing into a TFSA however, all money redeemed from the account is Tax Free regardless of when it is withdrawn. Furthermore, you do not lose your contribution room if you redeem money from the account; so if you invest $5000 and it grows to $7000 you can take the $7000 out without any tax implication and the following year you can put $7000 back into the account.
Both accounts carry forward unused contribution room, meaning if you don’t invest one year the allowable amount is added to the amount you can invest the following year.
A problem I see with TFSAs that people have set up is the type of investment they hold within the account. A lot of people are simply investing in High Interest Savings accounts, earning 1.5% on their money, why bother? The tax owing on 1.5% is so minimal, people should be investing for growth inside their TFSA and leave the High Interest Saving accounts for their short term or emergency funds.
