Whether you're just starting out in your career, getting ready to retire or saving up for a big ticket item, a TFSA can benefit just about everyone, whatever your financial goals may be.
Depending on what you're saving for - a large-ticket item or milestone in your life, your retirement, or simply for a rainy day - these three plans offer different benefits.
RRSPs are primarily intended for retirement while TFSAs can be used for retirement savings and other savings goals you might have. Both plans offer tax advantages but differ in three key ways:
In both accounts, contributions are made with after tax money, however the similarities stop there. In a TFSA, any earned interest, capital gains or dividend income remains tax free - but in a non-registered account, any earned income incurs taxes each year.
For greater insight on how the three measure up, consider the following example.
On January 1, 2010. John invested $5,000 to each of his newly opened TFSA and non-registered account*. Assuming a rate of return of 5.5% per year for both the TFSA and the non-registered account, a comparison of the investment income and after-tax proceeds to be expected after 20 years is shown below:
Source: AGF Investments Inc.
Since investment income (or gains) earned under a TFSA is not subject to tax, John will enjoy a tax savings of $3,717 in his TFSA compared to his non-registered account after 20 years.
*Investment income earned in the TFSA is not subject to tax therefore the rate of return is 5.5% per year.
Investment income earned in the non-registered account is subject to tax at a rate of 28% therefore the after-tax rate of return will be 4% per year (i.e., 5.5%x(1-28%)). The 28% investment tax rate is the weighted average tax rate on an investment portfolio comprised of 30% dividends, 15% capital gains and 40% interest (i.e., (30%+15%+40%)/3).