Investing in either a registered retirement savings plan or a tax-free savings account as a medical professional can be a significant decision, and there isn’t a “perfect” answer for everyone out there. Both options can help you save money and reduce your taxes, but ultimately, you need to decide on how to best achieve your financial goals.
Whether you contribute to one or both, you can optimize the advantages by strategically employing RRSPs and TFSAs. This can vary depending on your age, job stage, and where you are in your career. Getting the appropriate guidance is more important than ever, and that’s what we’re here for.
Let’s compare both options and dive deep into the benefits of how either option can help you get closer to your financial goals.
Both RRSPs and TFSAs are investment accounts that are registered with the Canada Revenue Agency and provide additional tax benefits to encourage Canadians to save more money. One commonality between these two options is the ability to top up your account at any moment. You can also roll over excess contribution capacity to future years if you don’t contribute to an RRSP or TFSA this year.
You also have a variety of options on how you can invest your funds. Both types of accounts allow you to put your money in a portfolio of qualifying products such as stocks, mutual funds, ETFs, and term deposits. If those benefits don’t catch your attention, we think this might! Lastly, through both options, you can lower your taxes! So, what really sets these accounts apart? The main distinction is in how they handle donations and withdrawals. Let’s take a closer look.
TFSAs
A TFSA can be used to put money aside for any purpose, long or short-term. This savings account can help you save money faster and more efficiently for anything you might need in the near or far future. Everything your investments earn is yours to keep, but because a TFSA is funded with after-tax money, it cannot be used to decrease income tax. That said, after you’ve made a contribution to your account, you get to retain every penny you make. Interest income and capital gains are never subject to taxation.
With a TFSA account, there is also no tax on withdrawals. You can take money out anytime, and there are no hidden charges or penalties on any withdrawals you make. Money from your TFSA doesn’t count as income, so it won’t trigger any taxation. If you’re still not sure if a TFSA is for you, one of the greatest benefits of your TFSA account is the ability to re-contribute after withdrawing. If you withdraw funds, you’re allowed to re-contribute that amount in the future and the amount withdrawn will be added back into your contribution room the following calendar year. This is great because it allows you to continue to grow your assets without losing contribution room.
RRSP
If you’re considering an RRSP, there are some benefits and differences that are worth nothing before making your decision. While the RRSP is generally created as a retirement savings account, the tax benefits may be beneficial at any period of lesser income in your career, such as parental leave or volunteer time. Any contributions you make will also qualify for a tax deduction. For income tax reasons, the amount you contribute can be deducted from your earned income. You can even get a tax refund as a result!
Until you withdraw, your investments are tax-deferred. Investments can grow tax-free as long as they are kept in your RRSP account. Withdrawals, on the other hand, are taxed in the same way as other pre-tax income and are fully taxable. You can still withdraw a certain amount of money from an RRSP tax-free for specific purposes (first-time homebuyers plan and lifelong learning plan), as long as the money is returned over time.
Either way, you’ll profit from compounding whether you save and invest in an RRSP, TFSA, or both. So, what should we do? Increase your TFSA today and your RRSP later. Try focusing on saving money in a TFSA if you’re still in the early phases of your residency or medical career. When you start making more money, you can contribute the maximum amount to your RRSP, which will benefit you in the long run because you will be in a higher tax bracket. Use any tax refunds to pay off debt and increase your savings. If you do contribute to an RRSP, consider using any tax refunds to pay down debt or increase your TFSA assets to stretch any benefits out over time.
The start of a new tax season coincides with the start of a new year, so now is the perfect time to make substantial decisions that can positively affect your financial standing. Understanding how RRSPs and TFSAs work will play a crucial role in your planning and might assist you more than you think as you consider your financial objectives and personal income tax filing for the 2021 tax year.
Here’s to getting ahead this year and planning out your targets for the future! To speak with a member of our MedTax.ca team on how we can help you with your RRSP and TFSA, click here.
