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Generally speaking, there are many good reasons to use registered savings vehicles over non-registered ones. You have more to gain, as they all offer tax advantages, plus RESPs are eligible for “free” money. Use the table below to contrast and compare the advantages and drawbacks of each savings vehicle. Your savings goals, investment objectives and tax rate will all influence your choice of accounts.
Use the table below to discover how RRSPs, RESPs, TFSAs and taxable non-registered investment accounts compare. The highlighted areas illustrate where the potential of an important tax advantage exists. Note that non-registered accounts have no special tax advantages when compared to registered accounts.
|
|
RRSPs |
RESPs |
TFSAs |
Non-Registered |
|---|---|---|---|---|
|
Contributions |
Before-tax dollars (or tax refund based on your tax rate) |
After-tax dollars |
After-tax dollars |
After-tax dollars |
|
Government grant |
No |
Yes, CESG to eligible child |
No |
No |
|
Tax on investment earnings (e.g., interest, dividends or capital gains) |
No |
No |
No, unless taxed by a foreign government |
Yes, in year received or accrued Capital gains at 50% rate in year deemed disposed |
|
Withdrawals taxed |
Yes, added to income in year withdrawn |
Investment earnings and CESG, in hands of eligible child Principal, not taxed |
No |
No |
|
Withdrawals may be re-contributed in a future year |
No |
No |
Yes |
Not applicable |
|
Income splitting |
Yes, your contributions may go into a spousal RRSP |
Yes, CESG and income withdrawn are taxed in child’s name |
Yes, you may contribute to another individual’s TFSA |
Limited, investment income and capital gains are attributed back to the contributor |
|
Who benefits the most? |
Those who are in a much higher tax bracket when contributing money than when withdrawing it |
The child named as the beneficiary |
Those who realize a high rate of return on their investments |
Those who generate dividends or capital gains, which are taxed more favourably than interest |
Although not included in this comparison, do not forget the tax deferral and tax-sheltering benefits provided by employer-sponsored registered pension plans and deferred profit sharing plans. Consider your employer’s contributions as an additional form of compensation. The more contributed on your behalf, the less you need to save to achieve your retirement goals.
If your employer permits or requires you to contribute to your company’s pension plan, consider those payments to be equivalent to RRSP contributions. If your company offers a matching program as an incentive (such as, matching your contributions up to a certain dollar value or percentage of your pay), consider your company’s contributions as “free money”.
