Yahoo Finance 32% of Canadians Are Making This RRSP and TFSA Mistake
As a Canadian, you have the right to two main types of investment savings accounts: your RRSP and TFSA. These are two accounts that you should know like the back of your hand. However, would you believe that 32% of Canadians don’t even know the difference between the two accounts?
Here are three differences between the TFSA and RRSP. Test your knowledge and make sure you know what they are.
The RRSP includes additional programs
Two programs could tip the scales towards you investing in the RRSP over the TFSA. These are the Lifelong Learning Plan (LLP) and the Home Buyer’s Plan (HBP).
The LLP allows you to withdraw money from your RRSP. You can use the money for full-time training or education for you or your spouse or common-law partner. The amount you can withdraw is $10,000 per year, up to a maximum of $20,000 total. You must repay the amount withdrawn within 10 years, with payments due every year.
The HBP is a program where you can withdraw up to $25,000 from your RRSP to buy or build a qualifying home. There is a proposal to increase the amount to $35,000, but this has not yet been implemented. You will have 15 years to repay the amount withdrawn, with payments due every year.
Money withdrawn from an RRSP is taxable income
RRSP income being taxable is a crucial difference between the RRSP and the TFSA. Your RRSP will be considered taxable income once you withdraw money from it, but your TFSA will not. It is a significant reason why the TFSA is a better investment vehicle for lower-income investors.
If your income is too high in retirement, this can disqualify you from other significant Canadian retirement allowances. You might be disqualified from the Guaranteed Income Supplement (GIS) that is for lower-income Canadians.
If you’re making less than $50,000 per year, invest in your TFSA before your RRSP.
The TFSA does not tax-shelter U.S. dividends
When you invest in a U.S. corporation from a standard account, the Internal Revenue Service levies a 15% withholding tax on dividend payments. The RRSP is exempt from these taxes, because of a treaty between Canada and the U.S. The TFSA does not have this exemption.
Take Toronto-Dominion Bank (TSX:TD)(NYSE:TD) as an example. TD Bank is a solid blue-chip Canadian bank stock with a market capitalization of $132 billion. The company is the second-largest bank by market capitalization in Canada and boasts a large U.S. presence. TD pays a dividend of 3.9% with a dividend-payout ratio of 44%.
Consider if you purchase TD stock in your TFSA using the New York Stock Exchange instead of the Toronto Stock Exchange. That stock would be considered a U.S. investment. The dividend payments would be subject to a 15% withholding tax in your TFSA.
If you purchase TD stock in your RRSP, your TD stock would not have a withholding tax applied to the dividends.
In conclusion
Now that you know three of the key differences between the RRSP and the TFSA, you can use this knowledge to make better investing decisions. Knowing what accounts are the best to invest in is one step towards building a robust investment portfolio.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.
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