An RRSP isn’t the only option to save your money

(NC) As we approach March 1, you may be feeling the pressure to maximize your contribution to your Registered Retirement Savings Plan – but that isn’t your only option to save for the future. Sometimes, it may be worth investing in other options like a Tax-Free Savings Account.

Choosing the best tool for saving can be difficult, and while both a TFSA and an RRSP will help you reach your end goal, they differ in many ways. Here is some information that can help you decide where to put your money.

Saving for the future. Both the TFSA and RRSP are methods to help you save for the future — whether that’s for education, purchasing your first home or retirement. Income earned in both plans can accumulate tax-free. However, because of the more flexible withdrawal rules, TFSAs are more typically used for short-term goals.

Contribution limit. Unlike saving money under the mattress, there is a limit to how much money you can contribute to either type of account. For TFSAs, the limit changes every year; in 2019 it’s $6,000, an increase from 2016-2018’s $5,500. Remember that while you are constrained to this upper limit, your total contribution is cumulative, so if you don’t contribute the maximum amount, you can roll over the contribution room year to year. For RRSPs, your contribution limit is based on 18 per cent of your earned income, to a maximum of $26,230 for 2018 plus any unused contribution room from previous years. To find out your limits, look at last year’s Notice of Assessment from the Canadian Revenue Agency.

Withdrawals. The best part about saving may be when you can withdraw the money you need. With a TFSA, you can withdraw funds any time you like without tax consequences. The amount you withdraw will also be added back to your contribution limit the following year. However, if you withdraw money from your RRSP, it will be included in your taxable income unless you are participating in the Home Buyer’s Plan or Lifelong Learning Plan. It will not be added back to your contribution limit.

Tax deductions. Unfortunately, contributions to TFSAs have no impact on your tax situation. However, contributions to RRSPs are tax deductible, reducing your income tax payable. If you contribute to your RRSP before the March 1 deadline of this year, you can claim a deduction on your upcoming tax return.

If you have questions about which savings vehicle makes sense for you, speak with one of H&R Block’s local tax experts.