When choosing between a TFSA and a RRSP, there are many different factors to consider. Everyone is in a different financial situation so what might suit one person may not suit another. You can open a TFSA account when you turn 18 years old.
No Tax vs Tax
In a TFSA, all money made from investments (capital gains) are tax free and you can withdrawal money without paying a fee. You can invest $6,500 a year but make sure you keep track of how much money you contribute. If you deposit more than $6,500 a year, your charged a fee. In a RRSP, when you take money out you have to pay a withholding tax rate. Also, the money you take out is added to your income and taxed at the end of the year. The withholding tax rate is different based on the withdrawal amount. See the blog The Pros and Cons of a RRSP for more information.
Income
A low-income earner would benefit from a TFSA since putting money in a RRSP would not be advantageous. You put money in an RRSP to reduce your taxable income, so you will either pay less taxes or get money back from the government. If your not making a lot of money then there is no sense in trying to reduce your taxable income.
Pension
A person with a pension would benefit from opening a TFSA. In retirement, taking money from a pension and a RRSP would increase your taxable income. Basically, you would have to pay more taxes at the end of the year. Having a TFSA would allow you to take out money tax free and you wouldn’t have to pay more taxes at the end of the year.
Passing On Wealth
A TFSA is a solid way to pass on wealth to beneficiaries. When an account holder passes, the beneficiary can have all the money in a TFSA withdrawn without paying taxes. Whereas, money withdrawn from a RRSP is taxed and the remaining amount is given to the beneficiary.
Conclusion
In conclusion, there are a variety of factors to consider when choosing between a TFSA and a RRSP and it will be based on your individual finances. Start investing using a TFSA when you turn 18 and buy ETFs within your account. Then based on your career choice when you get older you can decide whether or not to continue investing in a TFSA or to invest in a RRSP or both.
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