The pandemic has been challenging for everyone, and many of us are worried about the effect of COVID-19 on our savings and retirement plans.
According to a recent TD survey, one in three (35 per cent) Canadians say the pandemic has impacted their savings and retirement plans, and one quarter (25 per cent) of those affected have needed to cut back on contributions or stop them altogether. In some cases, the pandemic has also left some Canadians with additional savings because of changes in spending.
Regardless of whether you’re planning for long-term retirement or a shorter-term goal, your savings plan can include a TFSA, RRSP or both. Here, Jared Jarman, associate vice president, Specialized Advice Acquisition at TD, shares key information and differences between the two.
Tax-Free Savings Account
When to use it: A TFSA is designed to help you save for both long-term and short-term goals—this includes big ticket items like a new home, vehicle, travel, a wedding or your retirement. A key benefit is that your savings grow tax-free within the account.
Contributions: Unlike an RRSP, TFSA contributions are not tax-deductible. The amount of money you’re allowed to contribute is based on an annual limit set by the federal government; in 2021, it is $6,000.
However, unused contribution room accumulates from year to year. If you withdraw money one year and want to put it back in the same year, you’ll need to make sure you have contribution room left for that year; otherwise, you’ll have to wait for the following year. Any contributions made over your allotted contribution limit are subject to a 1 per cent per month penalty. You can confirm your total contribution limit with the Canada Revenue Agency.
Withdrawals: Withdrawals are generally tax-free, and the amount withdrawn is re-added to your contribution room at the start of the following year.
Registered Retirement Savings Plan
When to use it: An RRSP is designed to help you save for retirement. Contributions are deposited pre-tax, which means you only pay tax when you withdraw your funds. Contributions are tax-deductible.
Contributions: The amount of money you’re allowed to contribute is based on your earned income. The 2021 limit is up to 18 per cent of your annual earned income to a maximum of $27,830 ($27,230 for the 2020 tax year), subject to any pension adjustments plus any unused contribution room from past years.
Withdrawals: Since RRSPs are designed for long-term saving, withdrawals are subject to tax. However, there are exceptions. For example, under the RSP Home Buyers’ Plan, first-time buyers can withdraw up to $35,000 (or $70,000 for a couple) to finance a down payment, subject to eligibility and conditions. The withdrawal is tax-free but must be paid back over a period of 15 years, beginning in the second year following the year of withdrawal.
How do you decide?
There is no one-size-fits-all approach, and many people can benefit from holding both types of accounts.
If you’re interested in learning more, speak with a TD financial advisor who can help you assess your options. For more details, visit www.td.com/readyadvice, or get in touch with your local TD branch on the North Shore. Virtual appointments are also available.