Does A Tax-Free Savings Account Fit Your Retirement Plan?

Is a TFSA a good addition to your retirement planning? Yes, when you make it a part of your overall financial plan that includes your most important tax-saving, income-building investment – your Registered Retirement Savings Plan.

Here’s a quick comparison of the TFSA and an RRSP:

• RRSP contributions provide an immediate tax benefit because they are directly deductible from income. Contributions to a TFSA cannot be claimed as a tax deduction.

• Withdrawals from a TFSA are not taxed when withdrawn. RRSP withdrawals are added to income for tax purposes.

• The maximum yearly investment in a TFSA is $5,000 (although you can have more than one Account as long as you do not exceed the $5,000 limit in total). The RRSP contribution maximum is determined by your earned income. (In 2009, the maximum RRSP contribution limit is $21,000.)

• Generally, the same investments are ‘eligible’ for either a TFSA or RRSP – mutual funds, publicly-traded securities, government bonds, GICs, and segregated funds.

• TFSA funds can be withdrawn at any time for any purpose. RRSP funds are typically not withdrawn until after retirement.

• Withdrawn amounts can be put back into a TFSA without reducing contribution room.

• Unused TFSA and RRSP contribution room can be carried forward to future years.

• Withdrawals and income earned in a TFSA will not affect eligibility for federal income-tested benefits and credits including, the Age Credit, Old Age Security benefits or Guaranteed Income Supplement.

• There is no time limit at which a TFSA must be wound up or converted to a different investment. RRSPs must be wound up or converted by the end of the year when a person reaches age 71.

In retirement planning, a TFSA can be a good option:

• When your RRSP is maximized. Because the income is not taxed, a TFSA will likely deliver better returns over the long term than other non-registered investments – but the tax-sheltered, tax-saving, compound growth features of an RRSP still make it a much better choice for long term growth.

• As an incentive to save that ‘little extra’ for retirement, especially for those with modest means because the savings will not reduce income-tested benefits.

Is a TFSA in your future? Your professional planner can help you answer that question in the most profitable way.