RSPs (Retirement Savings Plans) vs TFSAs (Tax-Free Savings Account)… which one should you invest in?

By the Staff of the Revelstoke Credit Union

With tax season upon us many people ask “which one is better – an RSP or a TFSA”?  Well, that depends on each individual’s circumstance.

RSP’s can be a great advantage for the average person earning more than $35,000 annually before tax.  Consider this:

John Doe T4 Income from employer             $55,000

RSP contribution            $5,000

Taxable income after RSP contribution             $50,000

This puts John Doe at a marginal tax rate of approximately 30%, meaning he is above the lowest tax rate for BC which is approximately 20%.

RRSP contribution $5000 x 30% = $1500 income tax refund

This means that John Doe will have $5000 tax deferred and will receive an income tax refund that could be used for numerous reasons:  pay down debt, go on a holiday or be put back into an RSP for the following year.

Remember RSP’s aren’t just for retirement.  They can be used to purchase your first home or further your education.

Wouldn’t it be great to receive an income tax refund on your RSP contributions then turn around and borrow funds from yourself interest free to purchase that first home?

Tax-Free Savings Accounts (TFSA’s) have some amazing advantages as well.  If you earn less than $35,000 (gross) per year or you have already maximized your RSP contributions a Tax-Free Saving Account may be for you.  TFSA’s do not give you any income tax deductions but they do allow you to earn income on the investment without ever having to pay tax on the income earned.  What does this mean?  Consider this:

John Doe            $5000 contribution to TFSA earning 3% per year in interest

$5000 x 3% = $150 in interest to John Doe

If this same deposit had been in a GIC or Term Deposit it would look like this:

$5000 x 3% = $150 in taxable interest income

$150 x 30% = $45 to Revenue Canada

$105 to John Doe

(Remembering John Doe is earning $55,000 so he is in an approximate 30% tax bracket)

Book an appointment to sit down with your advisor and discuss which option is best for you.