The Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA) are personal finance accounts designed to encourage Canadians to save for retirement. They have the same intended action as a 401k in the United States. The Governments of the United States and Canada have created these accounts essentially because they feel their citizens, on average, are incapable of planning prudently for retirement savings. Would you be capable of saving for retirement without a TFSA, RRSP or 401k? Personal Finance doesn’t have to be difficult, just follow the guide below.
The point of this article is provide a guide for Canadians to decide which retirement savings options is in their best interest now and in the future. There are only 3 true options to consider:
- Open a TFSA
- Open an RRSP
- Open a TFSA and an RRSP
To decide which option is best suited to your personal financial needs, ask yourself the follow questions and be honest:
A) Can you afford to contribute to any of these Plans? I hope you answer yes because you must live within your means to accumulate any savings—essentially spend less than you earn.
B) Do you think your salary / income will increase substantially enough in the coming 5 years to place you in a higher tax bracket?
Federal Personal Income Tax Rates, Brackets and Surtaxes for 2009 copied from KPMG
C) Can you afford to contribute to both a TFSA and an RRSP?
Now to decide which of the above 3 options is right for you.
1. Open a TFSA: if you answered Yes to question A, and Yes to question B, but No to question C.
2. Opens an RRSP: if you answered Yes to question A, No to question B, and No to question C.
3. Opens a TFSA and an RRSP: if you answered Yes to question A, No or Yes to question B, and Yes to question C.
From here, you need to decide where you want to open your accounts and what kind of assets to invest in. On this Personal Finance Blog we regularly provide ideas for investments that make sense for any of the above accounts. My personal Tax Free Savings Account holdings are listed and always up to date on our TFSA Holdings Page.
There are many other great Personal Finance Blogs that provide investment ideas as well. Have a look at our blog roll for some of these sites.
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