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TFSAs and RRSPs: 10 true-or-false statements about common misconceptions

Posted on Thursday January 20, 2022

TFSAs and RRSPs: 10 true-or-false statements about common misconceptions

How much do you really know about TFSAs and RRSPs? Myths, misinformation, exceptions and differences between the types of investments: find out all the secrets of these two popular savings vehicles.

  1. You can withdraw money from a TFSA at any time without being taxed.


Unlike an RRSP, where taxes are levied on all withdrawals, it’s possible to withdraw funds from our TFSA without being taxed. The TFSA has a double tax advantage: the money grows tax-free, and withdrawals are never taxed.

  1. RRSPs are pointless because you pay taxes when you withdraw from them.


This is certainly the most common myth, yet upon closer examination, we see that the after- tax rate of return on contributions is tax-free.

Even with taxes on capital gains, interest income and dividends, the pre-tax money invested in an RRSP is more money than can be accumulated in a non-registered account. As Finance et Investissment magazine points out, you will always get a better return on a registered TFSA or RRSP account than on any other non-registered account.

  1. A TFSA can earn more than an RRSP.


It's the investor who makes the difference as they determine what type of investments they want to put in the TFSA, and it’s these investments that generate the return. The type of account itself has no influence. In this sense, choosing stocks or mutual funds to grow in a TFSA can be very attractive.

  1. It's more profitable to pay off your mortgage than to put money into an RRSP.


The pandemic has shaken the planet and our wallets...and sometimes for the better! Indeed, current interest rates on mortgages are so low that it's not necessarily advantageous to rush to pay them off. In the long term, the rate of return on an RRSP is higher. This is therefore a very good time to invest extra funds in an RRSP.

  1. If you die and have too much invested in RRSPs, there will be tax consequences.


In the event of death, the money accumulated in an RRSP can be transferred to a spouse without being taxed. However, if you have designated your child or any other person as a beneficiary, the money in your RRSP will be added to the annual taxable income of your designated beneficiary. If you don't have a spouse, converting your RRSPs to a RRIF at retirement will give you the opportunity to use your funds gradually, worry-free.

  1. The TFSA allows you to save without having to pay tax on the return.


Generally, interest, dividends and capital gains on any investment in a TFSA are not taxed - this is called tax-free savings. However, you may be taxed if you have prohibited or ineligible investments or if you exceed your annual contribution limit.

  1. Almost any investment contained in an RRSP is suitable for a TFSA.


Whether it's bonds, mutual funds or stocks, a TFSA is a savings tool just like an RRSP. You choose what type of investments you want to grow. Transferring investments from an RRSP to a TFSA is therefore entirely possible. If, however, you decide to move your investments into a traditional savings account, the return is not guaranteed.

  1. Having multiple TFSAs is very risky.


TFSAs are like children: while you keep an eye on each one, you can have as many as you want! Owning multiple TFSAs is indeed no problem, as long as you pay attention to some important aspects.

Make sure you don't exceed your annual contribution limit, as you may have to pay taxes. Also, make sure that the different TFSAs you have do not have significant management fees. If they do, it may be a good idea to combine your accounts.

  1. TFSA contributions can be deducted on your tax return.


Unlike RRSPs, TFSA contributions are not eligible for tax deductions, since the amounts you contribute and the interest you earn are completely tax-exempt, even when you withdraw them. Normally, as the Government of Canada confirms, it's not necessary to fill out a return for a TFSA... And that's a good thing. After all, who complains about having one less box to fill out on their income tax return?

  1. A TFSA can serve as an emergency fund.


Funds in a TFSA can be accessed at any time unless you have locked them up in a non- cashable investment yourself. This makes it a great account for unexpected expenses, whether it's for installing a new roof or making up for forgetting your loved one's birthday.

There! Now you’re now an expert on RRSPs and TFSAs. Next, you can learn about LIRAs, RESPs, LLPs, HBPs, RRIF-LIFs, MLGIs and GICs!

*Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing.  Unless otherwise stated, cash balances, mutual funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated.  Credential Securities is a registered mark owned by Aviso Wealth Inc.

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