As a new generation of Canadians begins dealing with the tricky field of finances, a common question we hear is “What kind of account should I have?” At Encompass Credit Union, we have a wide array of plans and programs for money-savvy Canadians and the most popular are TFSA and RSP accounts. Here are the differences between the two and the benefits of each:
What is a TFSA?
The Tax-Free Savings Account was created in 2009 and is a bank account designed for investments, as individuals can contribute stocks, bonds and money transfers to it. Luckily, the account has no fees for withdrawing cash and owners are not required to return any money withdrawn from the account. The drawback is that annual contribution limits are much lower compared to RSP accounts, with the current contribution limit being $6,000 a year. Another drawback is that a TFSA account does not grant an upfront tax refund and you do not gain annual interest on the funds you contributed.
What is an RSP?
An RSP, or Retirement Savings Plan, is a specialized bank account designed for retirement and longer-term saving. As an incentive for Canadians to plan ahead, all contributions to the RSP account are tax-deductible. Because you will be putting more money into the account over the years, the maximum limit on transferable funds is much higher and is based on your income, with the maximum contribution in 2018 being $26, 230. However, RSP accounts are not a regular savings account in that they cannot be withdrawn from freely. As they are designed for retirement, any withdrawals before the age of 71 will incur a withdrawal fee and must be replenished over time.
If you feel it’s time to get serious about your retirement plans or are looking to open an investment account, contact us today.