The choice between investing in a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) is based on your financial objectives and situation. Here's a brief comparison:
A TFSA allows for contributions that are not tax-deductible, but investment earnings and withdrawals are tax-free. There is a yearly contribution limit ($6,500 for 2023), with unused room that can be carried forward. Contributions over the limit are taxed. A TFSA ideal for short-term or emergency savings or supplementing retirement income.
On the other hand, contributions to an RRSP are tax-deductible and reduce taxable income. The maximum contribution to an RRSP is 18% of your previous year's income or the current fixed contribution limit ($30,780 for 2023), plus any unused RRSP deduction room from the preceding year. The contribution deadline for 2022 tax year is March 1, 2023. Withdrawals from an RRSP are taxed as income in the year they are taken. RRSPs ultimately defer taxes payable until withdrawals. An RRSP is ideal for long-term savings for retirement as there can be greater tax benefits.
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