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 for retirement or tax deferral are TFSA and RSP. 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 Luckily, the account has no fees for withdrawing cash and owners are not required to return any money withdrawn from the account.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 RSPs, with contribution limits set each year by the government, averaging about $5,000 per year (cumulative back from 2009, unless you just turned 18, in which the annual contribution begins after you turn 18). Another drawback is that a TFSA does not grant an upfront tax reduction.
What is an RSP?
An RSP, or Retirement Savings Plan, is a specialized investment 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, for example, in 2020 being $27,230. However, RSPs are not a regular savings account in that they cannot be withdrawn from freely.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, speak to one of our representatives at one of our branches today, or email us at firstname.lastname@example.org.