Best Health - - ADVICE -

With a TFSA, you can con­trib­ute up to $5,500 each year. Un­like an RRSP, though, this con­tri­bu­tion is not tax de­ductible. How­ever, your money grows tax-free while it re­mains in a TFSA.

When it comes to with­drawals, a TFSA is much more flex­i­ble than an RRSP: With­drawals from a TFSA are tax-free, you aren’t re­quired to with­draw from a TFSA if you don’t need to, and you’re able to re­con­tribute any TFSA with­drawals dur­ing the next cal­en­dar year.

So, to go back to your orig­i­nal ques­tion, should you con­trib­ute to a TFSA or an RRSP? While the an­swer de­pends on each per­son’s unique cir­cum­stances, there are some gen­eral guide­lines you can fol­low.

If you think you’ll need the money in the next cou­ple of years for a car pur­chase, a home ren­o­va­tion, an emer­gency fund or a fam­ily va­ca­tion, a TFSA is the bet­ter op­tion be­cause of its greater with­drawal f lex­i­bil­ity.

An RRSP is the bet­ter choice if you are in a higher tax bracket now but ex­pect to be in a lower one in re­tire­ment. The math be­hind this is that you’ll get a nice tax re­fund for con­tribut­ing at a higher tax rate to­day while pay­ing at a lower tax rate when you with­draw funds dur­ing re­tire­ment.

If you don’t think your tax rate will change in re­tire­ment, a TFSA may be the bet­ter choice. The ra­tio­nale is that the tax re­fund you would get from an RRSP con­tri­bu­tion to­day would be iden­ti­cal to the tax you would have to pay on with­drawal in re­tire­ment. Not­ing this equiv­a­lence, a TFSA may be more at­trac­tive given the fewer rules re­gard­ing with­drawals.

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