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How to choose between an RRSP or TFSA

(NC) With the March 3rd deadline fast approaching for making a contribution to a Registered Retirement Savings Plan (RRSP), many Canadians are wondering whether they should invest in an RRSP, in a Tax-Free Savings Account (TFSA), or split their dollars between the two.

RRSPs and TFSAs are investment vehicles that can help us save and invest in a tax-efficient manner. While the two vehicles can complement each other, it is important to understand how each can suit the needs of our individual circumstances depending on short, medium and long-term financial goals. Here's an overview of both:

A TFSA is a flexible and sensible option for all savers and investors, but is particularly suited for short-term financial goals such as saving for a vacation or a larger expense like a car or home renovations. It can also be used for those who have maximized their RRSP contribution.

With a TFSA, investors do not pay income tax on investment returns earned in the account and there are no taxes on funds that are withdrawn. Additionally, unused TFSA contribution room is carried forward and accumulates in future years. The federal government recently raised the annual contribution limit for a TFSA from $5,000 to $5,500.

An RRSP is a savings vehicle that allows you to save for retirement in a tax efficient manner. Contributions are tax-deductible, and savings have the potential to grow tax- deferred faster than if invested outside an RRSP. Moreover, this savings vehicle can hold a wide range of qualified investments and its funds can easily transition to retirement income.

“Canadians have many short-term or immediate needs in addition to long-term goals like saving for retirement,” says Chris Buttigieg, the senior Manager of wealth planning strategy at BMO Financial Group. “Ideally, people should consider earmarking funds for both a TFSA and an RRSP since each one offers distinct advantages, depending on your financial goals.”

For more information about TFSAs and RRSPs, speak with a financial professional or visit to find out which investment vehicle is right for you.

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