It’s that time of year again, tax time! Although no one likes having to pay taxes there are options to alleviate your tax bill or perhaps even get a refund depending on your situation.
Each dollar contributed to your RRSP is essentially deducted from your taxable income for that year. This makes it a powerful way to potentially save on taxes payable. So if this is so simple, why don’t more people take advantage of it?
Well, even though it provides an alluring deduction from your taxable income, the RRSP was primarily designed as a long-term savings vehicle. Don’t forget, the RRSP is a Registered Retirement Savings Plan. Only under certain conditions can you withdraw funds without penalty, such as for education purposes or buying your first home. Outside of those scenarios, a withdrawal from an RRSP is considered income in that year, is subject to withholding tax, and may increase the amount of tax you pay that year. To that end, you may be uncomfortable with the inflexibility of not being able to access your retirement funds early without an adverse tax consequence.
This is where the TFSA can provide an attractive alternative.
As with the RRSP, growth within your TFSA is also tax-free. However, the main benefit of a TFSA is that you can access the funds at any point in time without a tax consequence, making it an excellent vehicle for short or long term savings. Additionally, like an RRSP, your contribution room rolls over from year to year. It is important to note however, that your contributions are not tax-deductible, meaning that you don’t get any immediate tax relief in the year you contribute.
What's the bottom line?
As you might expect, there is no one size fits all solution. The answer very much depends on your financial situation.
We can help.
Our team can help you determine which account type may be most helpful in reaching your financial goals. Also, Capstone has Funds that are eminently suitable for both of these savings vehicles. Talk to your Portfolio Manager today to discuss your options.
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