Two tax-effective ways to save for retirement

December 14, 2020

Registered Retirement Savings Plans (RRSPs) and Tax Fee Savings Accounts (TFSAs) are both great tax-sheltered ways to save and invest.

The difference between the two lies in their tax treatment, but they are really mirror images of each other. With a TFSA you make the contribution in after-tax dollars, while with the RRSP you get a tax break now and pay the tax later. 

The RRSP advantage

When you make an RRSP contribution, you get the deduction (42.5 cents per $1 at the average tax rate) and the investment grows tax-free. You pay tax when money is withdrawn, often beginning at age 71 when RRSPs must be converted to a Registered Retirement Income Fund (RRIF). A RRIF is essentially an RRSP in reverse.  The rules require you to withdraw a certain amount each year so that Ottawa can get its tax back.

The TFSA advantage

A TFSA contribution is made with after tax dollars. There is no deduction, but the money grows free of tax and can be withdrawn free of tax. That’s why Wealthy Barber author David Chilton says TFSAs are the ‘Totally Fantastic Savings Account.’

TFSA’s were introduced in 2009 with a $5,000 limit that grows with inflation.  The contribution limit for 2021 is $6,000. 

Unused TFSA contribution room can be carried forward and any amounts withdrawn in the current year can only be put back in the following year. For someone who has never contributed and has been eligible for the TFSA since its introduction the accumulated room is $75,500.


Which one is better depends on your age, life cycle stage and investment goals.  Either way, as we live longer and fewer among us can count on company pensions, personal saving has to fill the gap.

Every year investors ask what they should put in?

 A Globe & Mail article argued that a prudent course is conservative investments to make the most of these tax energizers. 

Here’s why: The Fraser Institute estimates says that the average Canadian pays 42.5% of income in taxes, so $1 earned is really only 57.5 cents in hand.

An RRSP lets the full $1 work for you, growing and compounding over a long period of time. 

Of course, you pay tax when you take the money out, but you have also benefitted from a lot of growth over time.

So, if you lose money on an investment in an RRSP, you not only lose the capital, you also lose the compounding power because the sum is smaller. 

The effect is similar with TFSAs. You can withdraw money tax-free from a TFSA and recontribute it in the next year. But if the investment inside shrinks, you withdraw less and therefore recontribute less, so have less money to grow over time.

Harvest Portfolios Group ETFs are RRSP, RRIF and TFSA eligible and are growth oriented along with a dependable income streams in all business conditions.

Read more about Harvest Portfolios Group funds here.


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