You may already use a Registered Retirement Savings Plan (RRSP) to invest for the future. A Tax-Free Savings Account (TFSA) can be a great complement to an RRSP in your savings strategy. The challenge is deciding when it’s best to choose a TFSA over an RRSP. Read on for some general guidelines.

Choose a TFSA when:

You want easy and frequent access to your money

You’ll be able to withdraw funds from your TFSA tax-free at any time and re-contribute the same amount in the future. Meanwhile, you can keep your RRSP for long-term retirement savings.

You earn a low income

If you aren't earning much right now, you may benefit more from the tax-free growth and withdrawal flexibility of a TFSA than from the modest tax deduction of an RRSP. 

You're starting your career

When you're starting your career at a young age, that's a good time to invest in a TFSA before an RRSP. Over the coming years you’ll accumulate RRSP contribution room that you can eventually take advantage of when your income is higher and when claiming the RRSP tax deduction has a bigger impact.

You need to borrow money

A TFSA can be used as loan collateral; it is seen as an asset when your financial institution is determining whether to loan money to you. Just remember, the interest on money you borrow to invest in a TFSA is not tax deductible.

You have interest-bearing investments

When you have investments that are taxed at higher rates, such as Guaranteed Income Certificates (GICs), term deposits, money market mutual funds, or bonds, put them in a TFSA where the interest you earn can be sheltered from tax.

You have high risk/high return investments

When you have high risk/high return investments, it might be better to hold those in a TFSA instead of an RRSP or non-registered account. If your $5K grows to $50K you could withdraw it from your TFSA tax-free. The downside: you can’t claim a capital loss if your investments lose value.

You hold investments in a non-registered account

If you hold investments in a non-registered account such as a chequing account, consider transferring them ‘in-kind’ to your TFSA so they can grow tax-free. Make sure you talk to an expert first to learn whether there will be tax consequences.

You have a pension plan at work

When you have a pension plan at work but limited opportunities to contribute to an RRSP, use a TFSA to augment your retirement savings.

You're retiring in 10-20 years

If you plan to retire in the next 10-20 years, use a TFSA to complement your RRSP and grow the savings in your nest egg faster.

You're making maximum RRSP contributions

If you're already contributing to your annual RRSP limit, put additional savings in a TFSA instead of a non-registered account so your money can grow tax-free.

You need to reduce taxable income in retirement

If you need to reduce your taxable income in retirement, get a TFSA in addition to your RRSP. After you convert your RRSP into a Registered Retirement Income Fund (RRIF) at age 71, RRIF withdrawals are taxed, and the more money you withdraw the higher your marginal tax rate. By also withdrawing tax-free funds from a TFSA you can reduce your RRIF withdrawals, potentially lowering the overall tax you pay in your later years.

You don’t need all your RRIF withdrawal cash

The Canadian government expects that you withdraw a specified amount from your RRIF each year. If you don't need all your RRIF withdrawal cash, move it to a TFSA where it can grow tax-free until you need the money later.

You're receiving Old Age Security, the Canada Child Tax Benefit, Employment Insurance or the Guaranteed Income Supplement

If you're already recieving money from a government benefit program, consider investing in a TFSA to avoid potential clawbacks. TFSA interest earned or withdrawals aren’t considered income so won’t affect your government benefits.

In conclusion

These are all only generalizations. Each person's situation is unique. If you want to find out how to use a Tax-Free Savings Account to your advantage, talk to an expert at Coastal Community. We can answer your questions and help you invest in the future with your own Tax-Free Savings Account.