RRSPs and TFSAs: Smoothing the road to retirement

Saving money for retirement when you farm can be a challenge, especially if additional cash throughout the years has been reinvested back into the farm by purchasing assets like livestock, land or equipment.

The most important thing to know about RRSPs and TFSAs is which one to use and when.

However, adding savings plans from outside your farm operation can help smooth the retirement saving process. Diversifying your savings plans can help you access funds once you’ve stepped away from farming while cushioning retirement funds against market fluctuations.

Enhancing retirement planning with a savings plan will help ease the transition from active farming to retirement. Two common saving plan options are Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA).

RRSPs and TFSAs share both some distinct similarities and differences. From a retirement and tax point of view, it’s important to understand who should use these accounts and when.

RRSP vs TFSA: Similarities

Here are four ways RRSPs and TFSAs are parallel:

1. Funds accumulate tax-free if they remain in the accounts. That means that as the earnings are reinvested into the plans, you will not get an annual tax slip requiring you to pay tax on the earnings.

2. Contribution limits must be observed to avoid punitive penalties for over-contributions. The limit for RRSPs is calculated on your earned income from last year at a rate of 18%.

   TFSAs have a set limit for each taxpayer over the age of 18.

3. Unused contribution room for RRSPs and TFSAs can be carried forward indefinitely and used in future years.

4. The types of investments that are eligible are the same for either of these plans. These include shares on publicly traded stock exchanges, mutual funds, guaranteed investment certificates (GIC) or a simple high-interest savings account held at a financial institution.

RRSP vs TFSA: Differences

Here are three distinctions between RRSPs and TFSAs:

1. The amount of money you contribute to an RRSP can be deducted from your taxable income, whereas you can not deduct the amount you deposit into a TFSA.

2. Each plan has different results on withdrawals.

   The original investment plus the earnings in an RRSP become taxable income upon withdrawal. Therefore, proper planning is needed to take the funds out in a tax-effective manner.

   The original investment and the earnings from a TFSA are not taxable when withdrawn from the plan.

3. Upon death, RRSPs can transfer to a spouse only with no immediate tax implications, and the funds will be taxable to the surviving spouse when withdrawn.

   With a TFSA, upon death, the value of the investments can be transferred to any beneficiary of an estate. However, only the growth from the date of death will be taxable to the recipient.

Which is right?

The most important thing to know about RRSPs and TFSAs is which one to use and when.

TFSA plans could be used when personal taxable income is low, and a tax deduction is unnecessary. In years when your personal income is taxed in higher tax brackets, you could use an RRSP to reduce your tax burden. When you retire or have low-income tax years, the funds can be redeemed from your RRSP, resulting in true tax savings.  

Article by: Lance Stockbrugger

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