Use Your Tax Free Savings Account (TFSA) rather than Your Registered Retirement Savings Plan (RRSP). Canada 150 Recommendation #10

Every Canadian resident who is 18 and older can contribute to a TFSA. The TFSA plan allows for a contribution to grow tax-free and for the investment to be removed from the TFSA without tax being paid. The RRSP is similar but involves tax. You get a tax deduction when you make a contribution and you pay tax when you take it out of the RRSP. Let’s say that you plan to invest in something that you know is going to increase a lot in value over the next 20 years. Think Apple stock 20 years ago! If you make a $10,000 investment now and it goes up in value to $70,000 in 20 years you would be better off having invested in the TFSA. With the TFSA you forgo the tax deduction on the $10,000 but you avoid paying tax on $70,000.

If you made the same investment in an RRSP you would have gotten the deduction for $10,000 and now have to pay tax on $70,000. So you pay tax on a bigger number than the amount you were able to deduct.

The reason I hear that people are not considering the TFSA for their retirement is that they were unaware that a TFSA could contain any thing that you could put in an RRSP. People think the TFSA is just a bank account.

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