Page 8 - Nov-Dec 2022 Reporter

Insurance UPDATE

rrsp's and tfsa's: what to consider

eviewing the differences between an RRSP and
HUB INTERNATIONAL RTFSA can help savers decide on how to choose and $81,500 for the life of the account. For an RRSP,
the limit is up to 18% of income, or $29,210, for
LIMITED one or both. The RRSP and TFSA are both savings 2022 — there is no lifetime maximum contribution
vehicles, but often have different purposes, not to limit for RRSPs.
mention different rules and regulations governing Another important consideration for members
each. of a group RRSP is whether the plan sponsor
As with many investment decisions, taxes often makes a matching contribution: Some employers
tip the balance in favour of one or the other. will match 100% of the employee contribution,
The RRSP is a tax-deductible retirement amounting to “free money” accessible at
account. An individual’s contribution lowers retirement.
taxable income in the year they contribute But whereas an RRSP is taken out of a
to an RRSP. The earnings will paycheque, individuals can set up and make
"In addition to grow tax-deferred, but when it’s contributions to a TFSA on their own, regardless of
time to withdraw funds, RRSP employment status.
the registered account-holders pay taxes on the And while withdrawals can be made at any
withdrawals at the tax rate when the time for both vehicles, note that by age 71, RRSP
retirement savings money is withdrawn. accounts must be collapsed, with distribution taken
plan (RRSP), A tax-deductible RRSP is out as a lump sum or an annuity, or converted into a
attractive for those who expect registered retirement income fund (RRIF).
Canadians have the to be in a lower tax bracket when
tax-free savings they retire. For example, if an Beware of the clawback
account holder pays 30% taxes When deciding which investment vehicle is the
account (TFSA) as when working and then 20% in best fit, consider that government benefits can get
another option for retirement, he or she is ahead of the “clawed back” once an individual is above a certain
game. income level. Low and moderate earners for the
saving. Which one In comparison, the TFSA allows guaranteed income supplement (GIS) will lose 50
works best? As with tax-free withdrawals. There is cents in benefits for every dollar they withdraw
no tax deduction up front with from an RRSP.
most questions in contributions, but withdrawals — In addition, those with incomes above $79,054

personal finance, both in the form of contributions will see 15% of their Old Age Security (OAS)
and earnings — will be 100% tax pension clawed back for every dollar in additional
there's no one right free. income received from any source, including RRSP
Which is better? There’s no right withdrawals or RRIF payments.
answer." answer, but first consider current So, consider all implications, including taxes
income. Annual incomes of $50,000 and benefit clawbacks, when planning retirement
or less are taxed in a lower bracket account withdrawals. However, planning can begin
than higher incomes, so the up-front tax break may decades earlier. Although it’s hard to predict the
be minimal. It often makes sense to save using a future, it’s worth considering these financial risks
TFSA in this scenario. when evaluating which account to save in.
With annual earnings of greater than $50,000, Contact a HUB International Group
the RRSP generally gets the nod based on the Retirement advisor on the best path for financial
assumption that one’s tax rate would be lower independence.
when it’s time to make withdrawals.
Also, there are non-tax considerations. In 2022,
a TFSA has contribution limits of $6,000 annually
8 LBMAO Reporter -November-December 2022 www.lbmao.on.ca