It’s that time of year again — the deadline to contribute to a Registered Retirement Savings Plan (RRSP) is March 1st.
If you’re fortunate enough to have the cash, you’ll need to figure out how much you can contribute.
You’ll also have to decide which tax-sheltered vehicle is right for you: RRSP or Tax-Free Savings Account (TFSA)? Problem is — according to the Bank of Montreal — nearly a third surveyed don’t know the difference.
Basically, money contributed to an RRSP reduces your taxable income today. It grows tax-free but it will be taxed based on what is likely a lower income when you take money out in retirement.
A TFSA works the other way around. You don’t get a tax break now, but gains will be tax-free while in the account and when money is withdrawn.
There are a lot of variables involved when deciding which is right for you — like your income and when you’ll be pulling money out — but a little advice can go a long way.
“Getting hit with tax penalties or being penalized for over-contributing can start to eat away at the amount invested,” Mathieu Lepine, head of term investments at BMO.
For those that do understand the difference, more than half would pick a TFSA. Three-quarters say they are knowledgable about the TFSA.
The TFSA has been gaining in popularity compared to the RRSP. Since 2014, the gap in investment vehicle selected has risen to over 20 per cent. Even though the RRSP more specifically targets retirement, 69 percent of those 55 and over would choose a TFSA over an RRSP.
“For Baby Boomers that have built up their RRSPs, the TFSA can be used to enhance their lifestyle and dipped into for discretionary purchases like travel,” says Lepine.
Two-thirds of Generation X and Baby Boomers have an RRSP. Millennials are the least likely to have one — with 56 per cent claiming to not have an RRSP.
“As millennials start earning more and turn their minds towards retirement, RRSPs will nicely supplement what is being built up in the TFSA,” says Lepine.